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March 10-11, 1980 

U.S. Department of 

Health and Human Services 

Health Care Financing Administration 


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combine health financing and quality assurance programs into a single 
agency. HCFA is responsible for the Medicare program, Federal partici- 
pation in the Medicaid program, the Professional Standards Review program 
and a variety of other health care quality assurance programs. 

The mission of the Health Care Financing Administration is to promote the 
timely delivery of appropriate, quality health care to its beneficiaries 
- approximately 47 million of the nation's aged, disabled and poor. The 
Agency must also ensure that program beneficiaries are aware of the 
services for which they are eligible, that those services are accessible 
and of high quality and that Agency policies and actions promote effi- 
ciency and quality within the total health care delivery system. 

Care Financing Administration, Bureau of Program Operations, works with 
Federal, State, and contractor staff toward improved management of the 
Medicaid and Medicare programs. 

The M/MMI promotes program management improvements through problem 
analysis and technical assistance for corrective action, and fosters 
exchange of ideas and techniques through conferences, workshops, training 
and publications. 



March 10-11, 1980 

Medicaid/Medicare Management Institute 

Health Care Financing Administration 
Department of Health and Human Services 






"HCFA Contracting Strategies" 

(Former) Administrator 
Baltimore, MD 

HEALTH CARE IN THE 1980 's 17 

Under Secretary 
Washington, DC 







Executive Vice President 
California Physicians Service 
San Francisco, CA 

Deputy Administrator 
Baltimore, MD 






Annual Hospital Report 

Uniform Reporting 123 

Health Care Information Systems 

of the 1980's 127 

Operating Framework for HCFA 

Program Administration 137 

HCFA Goals for Improving 
Consistency, Accuracy and 
Comparability of Diagnosis 
and Procedure Labeling Systems 155 



Held in Dallas March 10-11, 1980, the first annual Medicare contractors' 
conference provided a forum for exchange of information and concerns between 
the Medicare contractor community and HCFA senior staff. Among the highlights 
of the conference were: presentations by HCFA Administrator Leonard D. 
Schaeffer on HCFA's plans for improving health care information systems and 
the program operating framework; and HH5 Under Secretary, Nathan Stark's 
speech "Health Care in the 1980 's." 

Panels of contractor executives and HCFA senior staff addressed program 
initiatives, issues and techniques relating to competitive procurement of 
Medicare contracts, evaluating the quality of health care and contractor 
performance, and improving services to beneficiaries. Four discussion papers 
were distributed which provide an overview of major HCFA initiatives impacting 
Medicare management; a policy statement on the Annual Hospital Report, and 
three discussion papers on Health Care Information Systems of the 1980 's, the 
Operating Framework for HCFA Program Administration, and HCFA Goals for 
Improving Consistency, Accuracy and Comparability of Diagnosis and Procedure 
Labeling Systems. Copies of these papers may be found in the appendix of this 
report . 

Approximately 250 people registered for the conference, including 
about 175 contractor executives, with 49 States and Puerto Rico represented. 
Other attendees included four State representatives, a consumer representa- 
tive. Medicare subcontractor executives, HCFA staff and a member of the 
President's Management Improvement Council. 





Director, M/MMI 
HCFA/Bureau of Program 

Baltimore, MD 

Regional Medicare 

Dallas, TX 

Deputy Director, BPO 
Baltimore, MD 


"HCFA Contracting Strategies" 

Baltimore, MD 



Director, BPO 
Baltimore, MD 

Resources: EARL M. COLLIER 

Deputy Administrator 


Baltimore, MD 

Vice President 
E.D.S. Federal Corp. 
Dallas, TX 

Vice President 
President's Management 

Improvement Council 
St. Louis, MO 



Blue Cross/Blue Shield 

of Massachusetts 
Boston, MA 





Under Secretary 
Washington, DC 


Moderator: PETER FOX 

Director, Office of 

Policy Analysis 
HCFA/Office of Legislation 

and Policy 
Washington, DC 

Resources: EARL M. COLLIER 

Vice President 
Health Insurance 

Association of America 
New York, NY 



Blue Cross/Blue Shield of 

Greater New York 
New York, NY 


Moderator: FREDERICK J. MALLEY, Jr. 
Vice President 
The Equitable Life Assurance 

Society of the U. S. 
New York, NY 

Resources: JOHN JANSAK 

Director, Office of Standards 

and Performance Evaluation 
Baltimore, MD 


Director, Office of Quality 

Control Programs 
HCFA/Bureau of Quality Control 
Baltimore, MD 


Director, Office of Program 

Baltimore, MD 




OF OPERATIONS (continued) 


Pennsylvania Blue Shield 
Camp Hill, PA 

Regional Director 
HCFA/Health Standards and 

Quality Bureau 
Dallas, TX 


Vice President 

The Prudential Insurance 

Company of America 
Millville, NJ 



Director of Government Programs 
Connecticut General Life 

Insurance Company 
Bloomfield, CT 

Resources: DON SLOO 

Vice President 

Blue Cross/Blue Shield 

Government Programs 
Mutual Hospital Insurance, Inc. 
Indianapolis, IN 


Second Vice President and 

Chief Medicare Administrator 
Occidental Life Insurance 

Company of California 
Los Angeles, CA 


Director, Office of Beneficiary 

Baltimore, MD 



National Council of Senior 

Youngstown, OH 




BENEFICIARIES (continued ) 

Director, Office of 

Public Affairs 
Baltimore, MD 


Executive Vice President 
California Physicians 

San Francisco, CA 




The health care industry is now the third largest in the country. The 
availability of health insurance — both publicly and privately funded — has 
contributed significantly to this growth, and today millions of Americans have 
access to health care benefits they would not otherwise enjoy. Your involve- 
ment in the nation's health care system has been vital to its success. We 
recognize the value of your partnership role in our publicly funded health 
care programs, and we share with you a number of common interests and 

Many of you present here today were involved in the pioneering efforts 
which established the Medicare program, and we recognize our indebtedness to 
you. It has been four years since the last national conference for Medicare 
contractors. This type of conference provides a good forum for exchanging 
viewpoints and experiences, and we plan to begin a series of annual meetings 
such as this one. 

The Surgeon General recently reported that the American people have never 
been healthier. They live longer. Infant mortality has decreased. Fewer 
Americans under forty-five die of cancer. The growth of the health care 
industry has brought us new standards in quality health care. Our medical 
technology holds the promise of even greater achievement in the next decade. 

The issue facing our country then is not whether we can provide quality 
care, but how to finance that care. Health care expenditures in the U. S. are 
almost $200 billion annually. This year, HCFA will spend about $47 billion 
bringing Medicare and Medicaid benefits to 47 million beneficiaries. In 1981, 
that figure will increase to $53 billion. 

HCFA's programs have become the largest single purchaser of health care 
in the nation. We pay 25?o of all the health expenditures in this country and 
40?o of acute, community hospital care. 

Our mission in HCFA is threefold: 

o To promote the timely, cost effective delivery of appropriate, 
quality health care services to our beneficiaries. 

o To make beneficiaries aware of the services for which they are 
eligible, and to make those services accessible to them in the most 
effective manner. 

o To ensure that our policies and actions promote efficiency and 
quality within the total health delivery system which serves all 
Americans. This requires a constructive relationship with providers 
and third parties involved in that system. 

This meeting is an example of how we intend to pursue the third part of 
our mission. We want to work with you to make improvements in our operations 
in a manner that will have a positive effect on both your public and private 
lines of business. Our goal is to help make the entire system more effective 
in serving both our beneficiaries and the general public. 

As we try to meet the nation's expectations for access to quality care, 
there is even greater demand for increased public spending to bring these 
benefits to the aged, poor and disabled - those in our population who are 
among the most vulnerable in our society. Our job in HCFA is to use the money 
available to meet our beneficiaries' needs in a manner that encourages both an 
efficient and effective health care system. That system must be efficient in 
terms of providing appropriate and necessary services at a reasonable cost, 
and effective in terms of the quality and timeliness of the care delivered to 
those people needing the service. 

In HCFA we have three basic functions: We establish policy and write 
regulations, we enter into agreements with States and contracts with fiscal 
agents to operate our programs, and we monitor the performance of States, 
contractors and individual providers. We do not see an increasing role for 
HCFA in the direct operation of our programs. We do not want to take on - and 
could not take on - your responsibilities or those of the States with regard 
to Medicare and Medicaid. . 

HCFA's basic responsibility is to use financing mechanisms to make health 
care services available to our beneficiaries. To do that in a time of 
extremely limited resources, we have to make more prudent management decisions 
which will in turn make better use of our limited dollars. 

For our dollars are truly limited. Health costs are escalating, and the 
financers of health care -- both public and private -- are running out of 
money. Productivity in this country is declining and thus real government 
revenues are not increasing in a time of inflation and competing demands. 
Private insurers are meeting increasing resistance to premium increases from 
their policyholders. 

In order to improve the management of our programs, we in HCFA must 
strive for changes m three areas: 

o We must find ways to simplify our programs -- make them more under- 
standable to both the providers and the beneficiaries. 

o We need to take steps to make Medicare and Medicaid more consistent 
with each other. While they are different programs with different 
beneficiary populations and eligibility requirements, they are 
functionally similar. We want to make them administratively more 
consistent in order to make it easier for providers and contractors 
to do business with us, and thereby improve access to care and 
services for our beneficiaries. 

o We must make changes in our methods of operation which help bring 
about improvements m the practices of the rest of the insurance 
industry and in the total health care system. 

We intend to continue our policy of contracting with others to operate 
our programs. Therefore, we do and will continue to rely on you. We are here 
today to discuss the nature of that reliance and of our relationship. 

Medicare could not have gotten off the ground in 1965 without the help of 
many of you who served as carriers and intermediaries in the early years. But 
the program has grown substantially, from $3 billion in 1967 to almost $34 
billion in 1980, and has become infinitely more complex and demanding upon all 
of us. 

As our financial and programmatic responsibilities grow, 1 believe that 
our relationship and mutual obligations must become more explicit and more 
rigorous. You must know what we expect and vice versa. We must be able to 
work cooperatively as we proceed in a common direction. 

There are two specific areas I would like to discuss with you this 
morning — health information systems for the 1980 's and the operating frame- 
work for HCFA programs. We have prepared discussion papers on these two 
issues which are available here today. We want to consult with the industry 
on these issues and view this conference as a beginning of that dialogue. 

Health Care Information Systems in the 1980' s 

When government financing of health care began. Medicare program 
operations were patterned after the systems used by health care insurers of 
the day and the existing approaches and tools were adopted for the public 

As the business of providing and financing health care to the nation 
evolved, programs were added, requirements were changed and both the public 
and private sectors refined their operations to meet their own growing needs 
and responsibilities, without much concern for how the behavior of one company 
or program affected the others. In fact, the impact on the industry of such 
changes was relatively insignificant at the time because there was little or 
no crossover activity or comparability of needs. 

But as the industry expanded so did data and information handling 
systems. Those systems have met, and many may continue to meet, the indi- 
vidual needs of users. However, overall the systems we use to process and pay 
claims are incompatible. This confounds communication, contributes to inef- 
ficiencies and inflation, and makes it extremely difficult to aggregate 
and analyze data. Today's health care financing systems — and I am referring 
to operating not reimbursement systems -- have evolved into what is really a 
nonsystem that is not capable of dealing comprehensively with the incredibly 
complex business of funding our nation's health care needs. Our systems needs 
have clearly changed. As we look toward the requirements of the 1980 's, we 
must build new systems that can reduce redundancy and improve the timeli- 
ness, accuracy, and efficiency of the health care financing process. 

We intend to examine this existing nonsystem alongside the anticipated 
demands of the future. In doing this, we want to collaborate with the in- 
dustry in developing and implementing a process for simplifying and unifying 
our health financing and information systems throughout the industry. The 
result should be a reduction in the present reporting burden on all providers, 
more accurate and timely reimbursement, and better information for health care 
managers and planners at all levels. 


We must establish common tools and instruments for communicating among 
the users and between providers and users. We must promote cost effective 
alternative systems for capturing and disseminating data to multiple users. 

To achieve these goals, HCFA is committed to working with the private 
sector to bring about major improvements in the management of health financing 
systems in the 1980 's. An example of how, together, we can work toward these 
ends is the process used in developing a common procedure labelling system. 
You recently received copies of a HCFA discussion paper on that subject. We 
have arrived at the position presented in the discussion paper only after 
intensive consultation with the private sector, particularly those most 
affected. The paper lays out our direction for the future, but we encourage 
you and other interested parties to advise us and participate with us m 
decisions regarding the implementation of the policy decision. We will be 
very flexible in terms of timing and specific implementation steps, but we 
will use all of HCFA's financing authorities to support our basic direction 
and will not fund incompatible systems m any of our programs. 

For this conference, we have prepared another HCFA discussion paper on 
the subject of Health Financing Systems of the 1980's. 1 would like to have 
your comments on the issues presented in the paper, which I must stress, is 
only a discussion draft. However, I would like to mention briefly some of the 
areas of particular concern. 

One focus will be on establishing common grounds for communication 
through implementing common coding, definitions, identifiers and data sets all 
designed to meet the needs of and facilitate communication among multiple 
users. Working together and coordinating our activities m this important 
area, we can realize immediate improvements in accuracy, timeliness, reduced 
costs, and significant reduction in the reporting requirements for providers. 
This can form the base for further improvements. 

We are testing various models of linking and transmitting hospital 
billing and discharge information. The basic model integrates and automates 
the patient bill and discharge data at the hospital. The provider can then 
transmit the data to a central clearinghouse which will reformat the data and 
forward it to the users. As an alternative, the provider may transmit the 
information directly to the users. Users of data include third party payors, 
PSROs, State and local health planners, as well as State rate setting 

These demonstrations shall prove that the development of consistent 
definitions, and the use of integrated, automated systems provides advantages 
for all participants. For example, providers can expect more accurate reim- 
bursement and more timely turn around which will improve their cash flow and 
at the same time provide a significant reduction in redundant recording and 
reporting. Users may expect to receive data ready for their immediate use, in 
addition to it being more accurate and timely. 

This more comprehensive approach to gathering information on health care 
financing activities will mean a corresponding reduction in the number of 
expensive data collection and processing systems and the number of personnel 
required to enter and correct data. Simply converting the transmission of 
paper documents from providers to fiscal agents to a process that involves 
computer to computer communication will substantially reduce the labor content 
involved in redundant data entry, and thus reduce cost and speed up process- 


Operational Framework for HCFA Programs 

There have been significant changes in Medicare and Medicaid program 
administration over the years with respect to technology, organization and 
program acceptance. The initial administrative structure served well the 
original needs of the programs. Reliance on the private sector contractors 
has been quite successful in the administration of both programs and there is 
no demonstrated need for changing those relationships. 

However, in Medicare the intense pressure of the growing workloads, the 
increasing complexities in policy and procedures, the new initiatives to 
contain health care costs, all have created a current environment that demands 
a new look at the administrative structure. We need to establish a framework 
of operations that will simplify our process and procedures, improve the 
timeliness and the accuracy of program payments, improve the quality of 
service to providers and beneficiaries and result in a better understanding 
and more uniform application of program policy. In short, we need an opera- 
tional framework which will more effectively serve program needs in the 1980 's 
and future years. 

In looking to the future, we need to address the desirability of combin- 
ing the administration of Medicare Part A and Medicare Part B into a single 
contractor structure. The initial separation of Part A and B was a result of 
the legislative development of the Medicare program. It is unlikely such a 
split would occur if the law were written today. There are many crossovers 
between the two parts of the program. 

Combining them under a single contractor for a defined geographic area 
should reduce administrative costs, provide for better utilization review and 
control of program payments, and simplify beneficiary access to the under- 
standing of the Medicare program. It also should improve the exchange of data 
with P5R0, Medicaid and other agencies, public and private, with a legitimate 
interest in program information. 

Another major aspect of our Medicare contracting that must be addressed 
is the lack of competition in the entire process. In our fiscal year 1981 
budget, an estimated $719.6 million will be spent on Medicare contracts. 
Except for funding a few experimental contracts which were awarded competi- 
tively, this money will be spent on negotiated contracts, with the contractors 
being reimbursed on a cost basis. No other program in the Federal government 
has such a high dollar volume of contracts awarded on a noncompetitive 

These and other issues relating to Medicare contracting have been ad- 
dressed in three studies. In 1978, an internal HEW study was carried out 
which concluded that Parts A and B administration should be combined into a 
single administration. Contracts should be let competitively, and contractors 
should be reimbursed on other than a cost basis. An independent study con- 
ducted by the General Accounting Office for Congress in 1979 supported many of 
these conclusions. 

The President's Management Improvement Council was established in 1979 to 
provide advice on ways to improve the management of Federal programs. One of 


its first steps was to create a Subcommittee on Health Care Costs which 
undertook as one of its first assignments a review of our contracting pro- 
cedures in Medicare. The Subcommittee's recommendations, as reflected m 
their draft report, support the selecting of contractors on a competitive 
basis, reduction in the overall number of contractor geographic areas based on 
optimum workloads. 

Changes to the operational framework of HCFA programs will take place 
over the next decade and will be consistent with a national health plan. 
These changes will focus on four basic objectives: 

1. Establishing specific standards of performance in contracts. These 
standards would serve as a basis for assessing financial damages or 
taking adverse contract action with respect to poor performance. 
They will also be the basis for incentive payments for superior 

2. Selecting and awarding contracts through competition and reimbursing 
contractors on other than a cost basis. 

3. Combining Medicare A and B administration in a single contractor. 

4. Establishing the territories of these combined A and B contractors 
on the basis of geography, workload and potential for absorbing new 
health insurance programs. 

We believe the achievement of these objectives will mean more timely 
service to providers and beneficiaries and more accurate program payments. At 
the same time, the cost to the government of Medicare administration should be 
reduced. There is much that we can do with our exisiting contracting author- 
ity to restructure our existing operational framework in accordance with these 
four objectives. 

In PL 95-142 (the Medicare/Medicaid Fraud and Abuse Amendments), Congress 
gave us the authority to establish national or regional intermediaries by type 
of providers. This legislation was brought about by Congressional concerns 
over our administration of the home health agency benefit. Final regulations 
are about to be published which will permit us to implement this legislation. 

This same legislation gave us authority to reassign providers from the 
nominated intermediary if that intermediary is doing a poor job. In line with 
this authority, performance standards for FY 1980 have been released to all 
Part A contractors. Standards for Part B contractors will be issued soon. 

Contractors who fail to meet the standards will risk termination of their 
contract or modification in the scope of their service. Under our existing 
performance standards system, we have identified and put on notice several 
contractors whose performance is not satisfactory. Those contractors are now 
working to meet performance objectives established by HCFA regional offices 
and their performance will be reassessed before the next contract period. 


There is a wide geographic dispersion of providers served by several of 
the large Part A commercial intermediaries. We plan to explore with these 
intermediaries how we might reduce this wide geographic dispersion into a more 
efficient arrangement. We will also be working with the Blue Cross Associa- 
tion to look at their subcontracts with local Blue Cross Plans. 

As you know, we have used our experimental authority to introduce 
competitive procurement into the Medicare contracting process. Under the 
experimental authority contained in Section 222 of the 1972 amendments, we 
have implemented three competitively let fixed price contracts in Medicare 
Part B in Maine, Illinois, and upstate New York. In Illinois, our experiment 
has had numerous -- and serious -- problems. We are working closely with our 
contractor in Illinois to solve those problems. 

We also initiated a Part A experiment in Missouri and a Part A and Part B 
experiment in the three State area of Colorado, Utah and Wyoming. In both 
these experiments, litigation is in process and future action is pending 
appellate court decisions. 

While these experiments have not been without problems, we have gained 
valuable information and experience from them. As a result, we will 
strengthen implementation performance requirements, have closer monitoring of 
performance and better testing of operational capability. The latter is 
extremely important if we are to prevent serious disruptions of service. We 
will also guard against marketplace domination by individual contractors or 
groups of contractors. 

Aside from our experimental authority, we want as a national policy to 
strengthen our entire audit and reimbursement activities, and if necessary, 
provide a higher level of funding for those activities than in the past. 
This, coupled with our emphasis on improved utilization controls resulting 
from increased PSRO activities and recent stepped up requirements for utiliza- 
tion screens, should provide better controls over program payments. 

Currently, there are 119 Medicare contractors with 76 in Part A and 43 in 
Part B. Administrative costs are running about $687 million a year (Part A, 
$239 million and Part B, $448 million) and the total claims workload to be 
processed is at 208 million claims (Part A, 42 million and Part B, 166 
million). If we modify our operating framework in accordance with the four 
basic objectives I just described, the existing contractor configuration would 
change significantly. 

For discussion purposes we have defined a "model" configuration of 50 to 
60 Medicare contractors with each contractor administering both Parts A and B 
in a defined territory. In determining the actual number of contractors in 
any new configuration, some other important factors to be considered are: (1) 
maintaining consistency with HEW regional boundaries; (2) using States as 
basic building blocks; (3) achieve, where possible, a workload for each 
contractor territory of four to ten million claims; (4) maintaining enough 
small contractors to assure entry level for new contractors; and (5) improve 
management of program payments and improve service to beneficiaries and 


We think that such a revised structure of Medicare contracting would 
bring about significant cost savings through economies of scale and reduced 
overhead costs. It could also result in improvement in the quality of serv- 
ices and in beneficiary and provider understanding. We estimate that such a 
configuration, if fully implemented, would result m administrative cost 
savings of over $120 million annually, measured against current costs. 

I see an evolutionary process as the best method of changing our operat- 
ing framework. We intend to consult with the industry, use our experimental 
authority to test our own ideas and those brought to us by the industry, and 
then make changes in a planned and prudent manner as contracts expire or poor 
performers are replaced. 

Our authority to consolidate Medicare Part A and Part B, and to select 
contractors competitively and reimburse them on other than a cost basis, is 
limited now to the experimental authority contained in the law. Therefore, we 
will continue to seek the necessary legislative changes. 

When legislative authority is obtained, we will develop implementation 
plans that are the least disruptive to beneficiaries and providers of serv- 
ices. Implementation will have to be phased in over a period of years and 
will be consistent with a national health plan. This will be a major procure- 
ment undertaking and it will be critical that we proceed consistent with our 
administrative capabilities to assure the least program disruption. 

It is important to note here that we do not propose frequent turnover in 
contractors. Rather, with some possible exceptions m the smaller jurisdic- 
tions, we contemplate contract terms in the range of five years with built-in 
options for extension and renegotiation of price at the end of the first three 
years. The contracts also will include specific performance standards which 
address quality, accuracy and timeliness of payments. This will, as the 
President's Management Improvement Council indicated, stimulate competition m 
the marketplace. 

We have developed a discussion paper on our contracting approach and we 
would like to have your comments and suggestions on the paper. Please re- 
member that this document is a discussion paper and we are quite sincere m 
our desire to have your comments. 

Process for Achieving Our Goals 

I believe it is extremely important to articulate a long range strategy 
to developing health financing and information systems for the 1980 's, and for 
refining our operating framework. We want to communicate our strategy to the 
public, our beneficiaries, the Congress, the existing contracting community, 
and those who may wish to enter the field m the future. Our views should be 
tempered by your advice. At the same time, we will pursue administrative 
actions and experimental initiatives consistent with our basic approach. 

In all our efforts to improve the framework in which our health care 
financing system operates, we are committed to assuring that all affected 
parties are involved in the decisions made and the actions taken. 


To that end^ we initiated an annual regulations agenda setting process 
and published our regulations agenda. The agenda includes all the regulations 
we intend to consider over the next year. I believe that this is a good way 
to involve all interested parties in the development of our policies. How- 
ever, it has not worked as well as I hoped it would. Regulations tend to deal 
with specific, narrow issues and not with the larger picture which is of 
concern to most of you here today. 

We now will undertake an additional approach. We will attempt to 
identify clusters of issues that all of us will have to deal with now and in 
the future. We will describe these issues in the form of HCFA discussion 
papers. You have already received one such paper on CPT-IV and we are making 
two more available to you today. I invite and I urge your comments and 
suggestions on these papers. 

We will consult with contractors. States, providers and beneficiaries on 
the discussion papers as they are developed. Meetings and public hearings on 
the various issues will be held to obtain the greatest possible input. From 
all the comments and discussions, we will decide on the direction we will take 
in the long term. 

Final decisions on these issues will be described in policy statements 
which result from the circulation and comments on discussion papers. We are 
distributing one such policy paper today concerning the Annual Hospital 
Report. I hope that in all cases our actions will be consistent with the 
needs of other finance programs. I see our role as one of facilitating 
change. I hope that we will be following your lead as often as possible. 
Once we have charted our direction we will let it be known and will focus 
HCFA's efforts and financial resources accordingly. We will work through the 
issues slowly and thoroughly, but once we make decisions, all of our programs 
will fund only those operating systems that are compatible with our announced 

I am committed to the greatest possible involvement of the private sector 
in HCFA's decision making process. I am convinced that your active partici- 
pation in this process is critical to the success of our efforts. It is also 
the only way that we can make sure that our actions contribute to improving 
the financing and delivery mechanisms of our nation's health care system. 




MR. STARK: In accepting your invitation to speak, I promised to focus my 
remarks on the future -- on trends I see developing and on planning now 
underway to prepare us for the coming years. I am certain you will understand 
if I approach those subjects with some hesitation. The pace of change -- in 
the area of health care and in every other aspect of modern life — is in- 
tensifying so quickly that today's wisdom is often hopelessly out of date by 
the time tomorrow's newspaper hits the doorstep. 

As risky as crystal ball gazing may be, however, no one seriously doubts 
the need for planning. Marshall McLuhan once said our generation has a habit 
of marching backwards into the future -- and none of us would argue that is 
the safest way to travel. 

If the planning we do in the health area is to be effective, we must 
first take into consideration the broader perspective. We cannot consider the 
question of health care in isolation — we must begin by asking ourselves 
about national trends, particularly trends in the nation's economy. 

In that light, I was particularly interested in an essay which contrasted 
two outlooks — appropriately named the "cowboy economy" and the "spaceship 

The first example — the "cowboy economy" — is based on a frontier 
mentality. It encourages rough and tumble, exploitive behavior. Consumption 
and production are to be encouraged at almost any cost — bigger is always 
better -- and management and conservation of resources are given little 

The second example offered in the essay is based on the mentality which 
would prevail m a space capsule whose inhabitants must exercise great care 
merely to survive. Success depends on the expert management, conservation and 
even recycling of resources. Recognizing limits as well as opportunities, 
this model emphasizes both cooperation and planning. 

There is little doubt that today's world is moving steadily toward the 
spaceship model. Our resources — while still awesome — are nevertheless 
finite, and the proper management of those resources is critical if society as 
a whole is to survive and prosper. 

These larger economic trends clearly also apply m the health area, and 
they are particularly important when we consider the delivery of health 

This IS, in President Carter's words, "an era of hard choices and scarce 
resources," and it is not possible to talk about the role of the public and 
the private sectors in the health field without acknowledging that fact. 
Against that background, what can we envision in the coming years in health 
care delivery? 

First of all, it is extremely unlikely that the role of the Federal 
government in health care will diminish. Now more than a decade old. Medicare 
and Medicaid have become widely accepted institutions which represent a 
national commitment to help the most vulnerable in our country -- the elderly 
and the poor. While both programs will certainly change over time, there is 
no real possibility that either will be reduced dramatically. 


In fact, the Federal commitment in the area of health will almost 
certainly increase. The House has passed and the Senate is now considering 
the Child Health Assurance Program (CHAP) -- the Administration's proposal to 
extend health benefits to an additional two million poor children and 100,000 
low income, pregnant women. The Administration's national health plan would 
make health insurance available to virtually all Americans -- including over 
40 million who now have inadequate health insurance or none at all. Proposals 
such as these would substantially increase the Federal role by providing 
greater access to health care. 

I believe that those particular measures are needed, but such an expan- 
sion of the Federal role m the health area carries with it an important 
responsibility. We must take these steps carefully -- setting standards and 
establishing policies which guarantee that programs provide quality care in 
the most cost effective way possible. 1 fully recognize that as the Federal 
expenditure for health increases, the challenge to manage programs efficiently 
increases as well. 

That challenge of efficiency is by no means limited to those of us in the 
Federal government, however. The private sector -- doctors, hospitals, 
nursing homes, insurance companies and many others -- must also help control 
costs or we will find ourselves collectively priced out of the market. 

I know that challenge can be met. An era of limited resources — barken- 
ing back to the spaceship analogy -- need not be a period of hardship. It can 
provide us with important opportunities to experiment, to develop programs 
which will give us more service for the dollar. 

For its part, HEW is moving m a number of ways to do just that. 

Of direct concern to this group, I know, is our effort to reform a 
reimbursement system which provides few incentives to contain costs. 

1 know you are all too familiar with the shortcomings of the current 
customary, prevailing and reasonable reimbursement structure. 

o It is confusing to beneficiaries and physicians because neither knows 
what Medicare will reimburse until carriers actually pay the claim. 

o It encourages the use of high price, high technology, hospital based 
medicine over office based primary care. 

o It produces unwarranted speciality differentials for physicians 
performing the same service. Further, its urban payments are 23% 
higher than rural ones. Both anomalies run counter to our efforts to 
redress geographic and specialty maldistribution. 

o Finally, it offers inadequate financial protection to beneficiaries 
on the 50% of claims that are not assigned. 

Those particulars do not describe the kind of system which provides 
quality care at a reasonable price. Clearly, we can and must do better. 

A sound reimbursement system should be designed to meet three basic 


o High quality care, efficiently delivered; 

o Broader physician participation resulting in wider access to care; 

o Administrative simplicity for both physician and beneficiary. 

These issues must be addressed fully in the current congressional debate 
on national health insurance. Of the various proposals now before Congress, I 
believe that President Carter's national health plan best addresses the goals 
of quality, efficiency and social equity. 

It would provide all Americans with protection against catastrophic 
medical expenses and an additional 15 million Americans with fully subsidized, 
comprehensive health insurance. The national health plan also seeks to 
enhance competition among providers and fiscal intermediaries. 

o Employers would be required to offer their employees all Federally 
qualified HMOs. They would be required to contribute equally to 
alternative plans. 

o Individuals covered under health care, the public program for the 
poor and the elderly, would have greater access to HMOs as a result 
of the reimbursement reform 1 will describe later. 

o Claims processors would be selected on the basis of competitive 

Health care would also establish important changes in the current infla- 
tionary reimbursement system. 

o Physicians, participating in health care, would be reimbursed on the 
basis of a negotiated fee schedule. 

o Hospital cost increases would be limited as prescribed in the Admini- 
stration's hospital cost containment proposal. 

In the next several minutes, let me highlight several other steps we 
should take short of the comprehensive reform envisioned in the national 
health plan. 

A Carter Administration proposal which we are working to enact would 
permit Medicare payments to HMOs at a set rate based on Medicare's cost for 
equivalent services in the fee-for-service system. By simplifying the payment 
system, this would encourage HMOs to enroll Medicare beneficiaries. In 
addition, savings between the payment rate and the actual cost of services 
would be passed on to beneficiaries in the form of lower copayments. Bene- 
ficiaries would not be at risk for physician bills in excess of Medicare 
reimbursement rates. 

Under the Administration proposal, for the first time, we would use the 
Medicare payment system to exert a constraining influence on health care 
costs. By promoting competition among delivery systems, we would encourage 
efficiency rather than continue to fuel inflation. 


With the risk sharing approach, we also recognize the profoundly im- 
portant role of physicians in determining utilization of health care re- 
sources. Experiments like Safeco's United Healthcare and Northwest Health- 
care, for instance, make primary care physicians the focal point of health 
care services and give them responsibility for managing costs of all care — 
hospitalization, referral-specialty care, ancillary services -- and these 
experiments deserve our full attention. 

But physician reimbursement reform is only part of the solution. Nearly 
half of the health care expenditures are for hospital care, and we must 
concentrate here as well. 

Hospital costs have been increasing at an average annual rate of nearly 
15 percent for the past decade, significantly above the comparable figure in 
the consumer price index. This increase stems in large measure from general 
inflation, rapidly advancing medical technology, excess hospital beds, and 
ineffectual planning. 

In addition, hospitals make more intensive use of personnel, tests, 
procedures and drugs than ever before. While it is easy to measure the costs 
of these changes, it is much harder to identify their impact on the quality of 

What we do know from experience under Medicare, Medicaid and many Blue 
Cross plans is that retrospective, cost based reimbursement is expensive, 
inflationary and highly inefficient. Because hospitals can recover virtually 
all costs actually incurred in the provision of care to individuals by third 
party payors, they face few incentives to assure that services are provided 
efficiently and that goods are purchased at the lowest available price. 

Moreover, generous treatment of costs associated with depreciation, 
interest, and equity capital have resulted in costly and often duplicative 
specialized services and highly sophisticated technologies. Often under- 
utilized, such services and equipment cannot pay for themselves. 

What can we do to alleviate these problems in the future? 

The Department will continue to refine our measures of hospital case-mix 
and the effect of case-mix on costs. We can anticipate expanding the applica- 
tion of hospital cost limits to total inpatient operating costs. 

In addition, the relationship between inpatient and outpatient costs must 
be explored further. Reforms which address only part of the hospital could 
result in unwarranted shifts of costs without reductions in total outlays for 
essentially the same services. 

Cost containment legislation as proposed by this Administration is the 
best short term remedy for reducing the rate of increase in hospital expend- 
itures. In the longer run, we can look forward to further efforts in at least 
two major directions. 

The first of these is movement away from retrospective cost based reim- 
bursement and toward prospective reimbursement. 


Second, we anticipate continued development of the health planning 
process and a strengthening of the link between reimbursement and planning. 
This is particularly critical as we begin to examine the way in which capital 
expenditures drive up current and future operating costs. Continued research 
is needed, so we can develop policies that will reduce excess capacity where 
we find it and foster carefully planned expansion only when it is justified by 
population growth and changing needs. 

Controlling costs is only one dimension of using our resources wisely. 
It IS equally important to anticipate the special health needs of a changing 

The growing proportion of those over 65 is a well recognized phenomenon 
in our culture. At the beginning of this century, the aged made up four 
percent of the total population. Today, they comprise 11 percent, and this 
proportion is expected to double in the next 50 years. In addition, among the 
aged, the number of people age 75 and older will increase from 38 percent to 
over 45 percent by the year 2000. 

The health care needs of the aged differ in many respects from the 
general population and that is particularly true in the area of long term 
care. The elderly, for instance, make up approximately 86 percent of the 
nursing home population. 

As I'm sure most of you know, there has been a historic bias in many of 
our coverage and reimbursement policies. The lack of sufficient reimbursement 
for community based care such as health, homemaker, nutrition and other 
services, may create an incentive to use nursing homes. Medicaid, the largest 
public payor of long term care, spends nearly 40 percent of its budget on 
nursing home care, yet only one percent on home health. 

The President's 1981 budget contains several proposals to reduce such 
institutional biases and to promote equity among current program benefici- 
aries. While these proposals can be expected to produce some savings, the 
important feature is the greater freedom they give individuals to choose the 
care most appropriate for their circumstances. Elimination of the three day 
prior hospitalization requirement, for example, should discourage unnecessary 
hospital stays that might otherwise be used because they are an avenue to 
obtaining home health benefits. 

In the course of my remarks today, I have touched on a number of im- 
portant health issues and suggested several ways the Department is seeking to 
refine and improve programs already in existence. I know this group in 
particular shares our determination to operate these valuable health programs 
in the most efficient way possible, and I know we can continue to count on 
your support in the coming months. 

As I look into the future, however, I cannot leave this podium without 
emphasizing the urgent need for greater access to health care in our country. 

Although the health of most Americans has never been better, the health 
of far too many is still poor. Millions of our fellow citizens -- most of 
them poor — are still denied quality health care because they live in rural 
areas or urban ghettos which are underserved by health professionals. 
Millions more — again, most of them poor -- are denied care because they 
cannot afford its ever increasing cost. Too many of our fellow citizens fear 
medical bills almost as much as illness itself. 

As long as those conditions prevail, we cannot say we have a health 
system worthy of this good country. We can do better, and in the coming 
months we must begin that task. 

Earlier 1 mentioned the Child Health Assurance Program and the national 
health plan -- two Carter Administration proposals which represent a giant 
step in the direction of quality care for all Americans, regardless of income 
or place of residence. These bills can be enacted, and 1 strongly encourage 
you to help us win support for them in Congress. 

Both bills are based on a fundamental partnership between the public and 
private sectors, a partnership this Administration is committed to see blossom 
in the years ahead. As one who has spent a career m the private sector, 1 
believe such cooperation is vital if we are to tackle the problems before us, 
and I encourage you to join with us in such an effort. 

Woodrow Wilson used to remind the nation that "Responsibility is propor- 
tionate to opportunity." The opportunities today cannot be denied, and I 
trust we will jointly accept the responsibility to work together to meet the 
challenges of the 1980 's ... to work together to better serve the American 

Thank you. 




Peter Fox 

Office of Policy Analysis, OLP, HCFA 

Panel Participants 
Earl M. Collier, 3r . 
Deputy Administrator, HCFA 

Louis Orsini 
Health Insurance Association of America 

Edwin R. Werner 
Blue Cross/Blue Shield of Greater New York 

MR. FOX: Welcome to the panel on Health Care in the 1980 's. 

Before I introduce the speakers, I'd like to read a story from this 
morning's Washington Post that goes at one of the fundamental economic and 
philosophical questions of our time, which is, what is a person worth? 

The headline is, "Value of Body Rises by 643% to $7.98." The story goes 
on: "Double digit inflation has driven the value of the human body up by 
a whopping 643 percent in the last ten years, but it is still a bargain. 
The human body's minerals and trace elements, worth only 98 cents in 1970, are 
now worth $7.98." It's the closing paragraph I like: "The body is full of hot 
air. Oxygen accounts for 65 percent of the body's weight, carbon dioxide 18 
percent, hydrogen 10 percent and nitrogen 3 percent." 

If any of the other panelists or anybody in the audience would care to 
comment on this later on, they are more than welcome to. 

I'm honored to chair a panel of distinguished speakers brought together 
by the Medicaid/Medicare Management Institute. The format will consist of 
each presenter having roughly 15 minutes, followed by a discussion among the 
panelists and from the floor. I would urge that everybody be free with their 
ideas. This is our opportunity to speculate about what the future might look 
like and how it will bear on all of us. At the end of the formal presenta- 
tions, I may or may not throw in my own two cents worth. 

The first speaker is Mr. Louis Orsini who is vice president and director 
of the Consumer and Professional Relations Division of the Health Insurance 
Association of America. Mr. Orsini joined HIAA in 1948, where he has served 
in a number of positions of increasing responsibility. From 1952 to 1963, he 
served as vice chairman of the Health Insurance Council, a federation of 
insurance associations, prior to becoming its first director. He is a guest 
lecturer on various aspects of private health insurance and the author of 
numerous articles on health insurance and health care cost containment, 
published in insurance and professional journals. 

MR. ORSINI: , In listening to the dialogue this morning and this after- 
noon, and respecting the moderator's suggestion that we talk for 15 minutes, I 
thought I would limit myself to noncontroversial subjects like the management 
of the health care system where we share a community interest with the Federal 
government, but really responding to the 95-5 percent equation. For those of 
you who want to talk about the contractor costs or the costs of administra- 
tion, there are far more competent people than myself here from the insurance 
side and they can discuss the details in whatever depth you would like. 

In listening to Secretary Stark's comments about the national health 
insurance issue, I'm going to resist the temptation to discuss that part of 
the question because we are on record, we have filed our testimony before the 
House Ways and Means Committee, and that, itself, could take all of the 15 

But we are interested in talking about the issue of how to manage the 
system. We are interested in talking about the planning strategy to be 
implemented by the planning law which is now in Phase 3. We are interested in 


the objectives of the PSRO law, which was designed to develop the strategy 
through which we pay for necessary care, but encourage doctors to stop doing 
things that are wasteful. And we are interested in the longer range strategy 
of how do we establish pragmatic incentives to contain costs. 

The dilemma that we have is because most of the approaches in this area 
have been fragmented in their impact on the system. For example, the Federal 
strategies in developing a planning approach have isolated planning from the 
reimbursement process, to a degree. They have isolated the PSRO process to 
the Medicare and Medicaid area and, to that degree, we find that much of what 
happens in the system simply takes the burden from one major payor and shifts 
it to another. 

In the same way, as we look at the problem of cost containment, we find 
that, in looking at the longer range strategy of how you contain costs, there 
are a number of very, very popular options out there. First is the voluntary 
effort idea, which has a large constituency withm business who are opposed to 
regulation, and they allege that they can do it better than anybody else. 
There are the marketplace options which are now being popularly held out to 
the consumer as, if you only knew enough about it, you could probably pick the 
least costly, most effective physician, and he'll take care of you on a 
cheaper basis, and that's all you need to do. And then, finally, there are 
those initiatives that are going on without new legislation, which tend to 
produce cost predictability for Medicare and Medicaid and which tend to swell 
the burden assumed by the private sector patient. 

So, I think we are at the point now where we ought to be looking at and 
recognizing that what we need is no longer a confrontation between those who 
favor regulation and those who are for marketplace or for the voluntary 
initiatives. We need to recognize that government is here, the government has 
a role to play, and that we ought to begin to plan together as to how we 
confront the management initiatives. 

When I use the term "government," 1 mean we've got to start talking with 
the Federal and State governments, and we need to bring into the dialogue 
those people from business and labor who are paying the bill. 

Now, if we begin to do that, we've got to recognize that the planning law 
has developed some very serious shortcomings. As a cost containment strategy, 
it IS going to be ineffective simply because it deals with too small a per- 
centage of the total hospital budget. As a strategy for developing an in- 
formed consumer constituency to blunt the self-interest of the providers, it 
has developed some real problems. 

We need planning. We need assurance that the system expands in a way 
which improves access to care. We need to provide incentives which respond to 
the problem that, within many communities, we have an oversupply of beds and 
it IS merely the existence of those beds which is driving the inflation or the 
utilization of hospital care up by itself. 

We have to recognize that the incentives to modify, to convert, or even 
to close -- not perhaps in that sequence -- have to be faced more effectively. 
We have not been able to close beds through the planning process. It's 
questionable whether we ever will be able to close beds through the planning 
process because of the high emotional content of the issue when it is debated 
within the community that is having beds closed. 


So, we have to look at planning, assess where we are, what its accom- 
plishments and problems have been to date, and then decide how we can test 
what needs to be done to strengthen the process. What seems to come through 
loud and clear is that planning, standing alone, will have limited impact and 
it has to be blended with some overall reimbursement strategy. 

Now, let's look at the second piece of the pie, this whole question of 
how doctors use hospitals and whether the incentives that are out there 
currently will produce the re-examination of physician practices to deal with 
those situations where, over a period of time, the hospital use rate has been 
inflated because of the existence of differences of reimbursement, or because 
of the availability of beds, or simply because of physician convenience. How 
can we address those issues in a way that is going to make sense? 

We've seen real progress being made by some of the HMOs and the IPAs as 
options. We've seen that the differences in hospital use rate, when you 
introduce an HMO and an IPA, in terms of what was going on in the community, 
can be somewhat dramatic. 

What we have not really recognized, however, is that those same efforts 
have produced other problems. For example, we've seen that the IPA develop- 
ment in the Twin Cities, which has represented 75 percent of the physicians in 
their involvement, appear to be developing a dual pattern of hospital use: 
between 5 percent of the patients, who utilize hospitals under the IPA mode 
with the same doctors, and the other 95 percent of the patients being treated 
under the traditional fee-for-service mechanism, there's a 300 percent differ- 
ence in utilization. 

Now, some of that may be accommodated for by differences in age or 
population characteristics, but the facts are that we really ought to know why 
those changes occur and we ought to devise a system for addressing that kind 
of a variance in an intelligent way. 

As we look at the larger question of how we contain costs, long range, 
everybody has their own ideas. We are not at any stage where we can say we've 
got a solid constituency with which we can march together toward one solution. 
We all have our own biases as to how to do it, and we respect the fact that 
some people think that the voluntary effort is really stimulating the private 
sector to do the things that need to be done to restrain cost increases. We 
have trouble with the voluntary effort accomplishments because of the softness 
of the information base. After all, the voluntary effort's measurements of 
progress are being based on increases in hospital expenses. That reflects 
what the hospitals spend, but we think the consumers are more interested in 
what they spend. 

So, we think that when you measure the impact of the voluntary effort in 
terms of net patient revenue, you find some widespread variations in area by 
area, not the least of which is to track the impact of the rate of increase in 
net patient revenue in the seven States that had mandated programs for 1978 — 
which was 9.7 — with the other 43 States, which was 13.7. 

Now, a four point variation in national expenditures for hospital care 
tends to exceed $3 billion a year. We can't ignore that. 


When we look at the State mandated programs — and there is no one option 
in that area that is doing the job effectively across the board, but they seem 
to show some more promise — however, we find that they, too, have their 
problems. But what they have going for them, we think, is a better data base, 
a better information system, and we can recognize that what they are faced 
with is an across the board control, so the difference between the mandated 
programs and those that are not mandated is they either close out or minimize 
the option for cost shifting. 

Now, where does this leave us? What I've tried to say is that planning 
at objectives we could all subscribe to — they were public interest oriented 
— we share what the government wanted to do through the planning process. 

PSRO had objectives we could all subscribe to. We share what the Federal 
government wanted to do in the PSRO process. We share what the Federal 
government wants to do with cost containment. 

What we differ is on how we get there. We think that at this stage of 
the game perhaps the most effective contribution that could be made is to back 
off and to stimulate a wide range of options for improving the effectiveness 
of all three of those programs, but to do it in a way where we have in place a 
management information system. This is where the Federal government has more 
leverage to stimulate the collection of that kind of information than any 
other single source. 

We recognize the interest in integrated data demonstration projects and 
we are anxious to work with the Federal government in that area. We recognize 
the interest in standardizing the nomenclature and the coding, and we are 
anxious to cooperate m that direction. 

But, does it go far enough? We think that there has to be a standardiza- 
tion of not only the elements of costs that are collected, so that as we 
compare competing options we are doing so on the basis of a comparable cost 
base, if it's hospital costs, but that we also have to be prepared to track 
variations in utilization by major sources of financing. By that I mean we 
should be able to break out baseline data so that we can follow, by hospital, 
by diagnosis, the experience of Medicare, Medicaid, insurance. Blue Cross, 
HMOs, IPAs, and all others. And, based upon that information, do our assess- 
ment of which of these initiatives work, which produce reciprocal problems 
within the system, which simply shift the burden to somebody else, and what's 
the direction we should all be moving in, together, to develop a uniform 
reimbursement concept which responds to public interest objectives, not to 
short range cost predictability strategies. 

MR. FOX: The next speaker is Edwin R. Werner, who is president of Blue 
Cross and Blue Shield of Greater New York. 

Mr. Werner has spent his entire career with Blue Cross and Blue Shield, 
starting in 1940 with the New York Plan. After three and one-half years in 
the Army, he joined the Chicago Blue Cross/Blue Shield Plan. In 1957, he 
joined the Blue Shield Association as assistant to the president. 


In 1961, he returned to Blue Cross in New York City as vice president for 
marketing, and then held various senior level positions until he became 
president in 1972. 

Mr. Werner was instrumental in effecting the Blue Shield-Blue Cross 
merger in New York City, the largest merger in the history of the Blue Cross/ 
Blue Shield system. He has been active in the New York State Hospital Review 
and Planning Council, the New York State Senate Health Advisory Committee, and 
the New York State Health Care Financing Council. 

MR. WERNER: Somebody once said that an expert was somebody more than a 
hundred miles from home, and I guess that suggests that when he or she is a 
hundred miles from home, there is nobody around who knows whether his or her 
field of expertise is really legitimate or not. 

Well, I'm almost 2,000 miles from home, but I'm in a peculiar position. 
You heard from Leonard Schaeffer this morning. He spent some time with 
CitiBank, which is in New York; Duke Collier, whom you'll hear from in a few 
minutes, clearly got more than a mild exposure to New York when he passed 
through there as Deputy Director of the Office of Health Systems Management; 
and Lou Orsini's office is just a little bit up the street from me, in the 
high rent district; so I disqualify myself as an expert. 

The Under Secretary was very generous in his opening comments. He said 
he was glad to be in Dallas away from Washington where all he heard about were 
the unique and serious problems in New York. Well, here I am, unique and 

Unlike Lou, I will tend to be a little more provincial in my comments, 
although I hope some of them have some bearing on more than the New York 
scene. My reason for being provincial and my justification for it probably 
comes from a rephrasing of a line in a very popular song from a very popular 
New York show in which the star said, "If you can make it there, you can make 
it anywhere." She was talking about the Big Apple. My paraphrase is: if it 
can happen there^ it can happen anywhere. 

We have some unique situations in the New York area, which I don't wish 
on any of you, but I suggest that they are worthy of some recognition, both by 
you and by the Administration and by HCFA. 

I was particularly impressed with the Under Secretary's comments about 
the desire to move from retrospective reimbursement of institutions to pro- 
spective reimbursement of institutions. We think — although there may be one 
or two in the audience who would quarrel with me — that we were first in New 
York. The Blue Cross Plan moved to prospective reimbursement immediately 
after a change m the law in 1969, and we think it has made a noticeable 
contribution, and it is also the reimbursement for Medicaid in New York. We 
think it has made a noticeable contribution to single digit increases in 
reimbursement levels to New York hospitals, not just in 1979, but for five 
prior consecutive years, while the nation was seeing double digit with great 

I was equally impressed with his concerns about home health services as 
an alternative to expensive, acute general hospital care. We take some pride 
in that, too. We moved into the home health care concept, and to a benefit 


structure that incorporated it in 1957. We are completely convinced that it 
is, in many instances, a viable alternative to horizontal care in hospitals 
and, clearly, a cost effective movement. 

I share with him and with you a concern for the planning process. 
Although I think planning has done well in some locations, — it has certain- 
ly made an impact on the New York environment — I have been troubled during 
my term on the Planning Council in New York by what I believe is a lack of a 
major game plan. 

There is evolving in the New York environment, and in other places, a 
view toward doing two things: one, most importantly, is to have a broad-based 
community plan for where health services need to be in the days, months and 
years ahead. Secondly, an active participatory in testing the experiment in 
the "batching process" for projects, so that a planning council is not looking 
at projects out of context without a full relationship to how the projects 
bear on a game plan which makes some sense. 

I sit here and say to you this afternoon that, clearly, in my mmd, the 
cost of health care is going to continue to rise. The commitment that has 
been made by Medicare to the aged, by Medicaid to the poor, and by Blue Cross 
Blue Shield and the insurance industry to its insured, is not going to be 
fulfilled without more money. On the other hand, that is not to say that I 
condone or believe that all of the "more money" that providers may ask for is 
appropriate. Conversely, I do believe -- and I think this is where the thrust 
of this group and all that we represent, collectively, has to be brought to 
bear — that we need to be as concerned about how many units of care are used, 
as to how much the unit costs, and what kinds of units are being used. 

I grieve that I sit here this afternoon and say to you that there are 
many people in hospitals in New York for only one reason: they are in acute 
general care facilities because there are not enough long term facilities to 
accommodate them. I suggest additionally to you that there are needed incen- 
tives and assurances, either to create those facilities, or to the extent that 
we are overbedded, to reduce beds. The Federal government and Medicare, the 
State and Medicaid, Blue Cross Blue Shield and others need to assure those 
providers, whether voluntary or proprietary or governmental, that during the 
transition period, as we move those beds from unneeded acute to needed long 
term, they can do so with some protection against the risk of loss. 

Without that, we get what all of you have read about and some of you have- 
felt — community pressure, political pressure for hospitals that are about to 
close, to do nothing but stay open, to demand all kinds of infusions of funds, 
both public and private, to maintain them in the status to which they have 
been accustomed. That is not in the public interest. It is not in the 
interest of Title XVIII or Title XIX, nor in the interest of the self-sustain- 
ing portion of the population. 

We certainly have compressed the revenues of institutions in New York, as 
they have been also in some other parts of the country, and a few hospitals 
have gone under; they've closed, become parking lots, apartment hotels. Yet, 
I'm not sure, sitting here, that the right hospitals have closed in the right 
areas. It tends to be the weak ones. It tends to be those whose costs are 
low. I ask you to figure for yourself what happens to the patients that would 


have been there. They leave a $150 per day facility, and more than half of 
them find their way into a $300 per day facility; we haven't gained anything, 
from an economic point of view. I recognize, however, that we made some 
sound qualitative, geographic, and depth of service decisions; the problem is 
"may" — the degree of certainty is unsatisfactory. 

We need mergers of hospitals and, again, we need some assurances. Let me 
give you an example. 

Two of the more prestigious hospitals in New York, St. Luke's and 
Roosevelt, both on the west side of Manhattan, both affiliated with the same 
medical school, saw a desire, a need, an opportunity to merge. One is roughly 
a 600 bed hospital and the other an 800 bed hospital. Clearly, in the long 
pull, in my judgment, that was a wise thing for those two hospitals to do. 
And yet I tell you that without the assurances from those who control the 
purse strings that the short term immediate increase in cost, which is inher- 
ent in such mergers, would be financed while programs are compressed and 
physical plants are adjusted, this very worthwhile merger would never have 

We have to find the incentives to encourage change and, if that means 
some short term money for long term gain, I submit it is important to all 
of us. 

Today the fight is escalating to pay more physicians by fee schedule in 
lieu of the way in which physicians are now compensated. I have no quarrel 
with fee schedules. My record on that is abundantly clear. It seems to me, 
however, that if we are going to have fee schedules, we must decide in what 
areas they will apply, at what level they will be cut, and how do you make 
appropriate reductions for the present form of reimbursement. Clearly, if the 
commitment of Congress intended by Part B is to be met, then fee schedules 
have to attract at least as much attention and support from the profession as 
the "assignment" process does now. 

I would say to you that the governmental forces in 1966 did not believe 
that assignments would fall to the 50 percent level. Certainly a lower level 
than the commitment that Congress intended to make to aged people and, yet, to 
do anything with that, clearly is going to cost more; but the answer is not 
necessarily to do so through fee schedules. 

I would like to encourage some dialogue this afternoon on the question of 
how do we move people to use the multiplicity of provider resources available 
to them more effectively. There needs to be some incentive for the institu- 
tions and individual and group providers willing to cooperate with efforts 
towards increased use of ambulatory and home care experiments. Only then will 
more facilities be closed, so that new patients don't find their way in, 
occupancy levels don't stay high despite what you do about alternate delivery 
systems. There must be some incentives for them to do so, some assurances 
that they will have adequate revenue during the period of time when transition 
is occurring. 

I now change gears only to make what I suppose is a controversial point 
to some, but 1 think important. It seems to me that when Congress enacted 
Title XVIII, it intended copayments and deductibles, but I'm not sure that it 


could see 15 years ahead and realize what would happen to the burden that 
falls upon aged people to pay those deductibles and copayments. If they could 
have seen $A0 become $180, if they could have seen the copay of 20 percent in 
its relationship to today's physicians' fees, they would have seen what I 
think all of us see, a pretty heavy burden on the aged to pay for that portion 
of their health care not compensated for under Medicare. Truly, if we are 
going to control the aged portion of payments in relation to the economic 
index, then, I submit to you, it bears very little relationship to their 
income, whether it be Social Security income or fixed income from an annuity, 
etc. Thus, the commitment of Congress isn't being kept quite as aggressively 
as it should be. We need some type of a cap on that portion of the burden 
falling on the aged people. Using copayments as a utilization control has yet 
to be proved, and using them to lower the cost to the government is not 
totally fair to the aged. If we are going to continue in a double digit 
inflation economy, we're going to skyrocket deductibles and copays as they are 
presently legislated, and we are passing the burden on to those who can ill 
afford to pay for it. 

Now, all of the subjects that I've mentioned are intended to stimulate 
some dialogue and really have a theme. If it hasn't come clear, let me make 
it so to you. There are a series of forces at play in health care financing 
and impacting on the health care system — Medicaid, at the local-State- 
Federal level; Medicare, at the Federal level; and very clearly, the large 
private sector third party payors. If we want to impact on the system, if we 
want to make providers change their ways, if we want to make patients change 
their habits, then a closer partnership between these three groupings is 

I would suggest also, with all due respect to the Federal establishment, 
that some of the solutions to some of the problems are necessarily parochial, 
they are provincial; they must be tailored to local circumstances and are not 
conducive to a single national utterance that says, "This is the way it is 
going to be." 

So, in summary, I am suggesting that we discuss this afternoon, in part, 
how that partnership can work better. 

I understand there was some discussion this morning about fixed price and 
administrative cost. I admit to being aggrieved at what I have perceived to 
be more attention to the three percent program cost which goes to administra- 
tion, and less concern for the 97 percent that goes for benefits. Truly, I 
accept the fact that administrative costs should be as low as possible, but 
they should not intrude on our ability to impact the health care system 
because that's where the big money is for now and the future. 

MR. FOX: The next speaker is one of the many people in Washington I get 
to take orders from, Duke Collier, who is a lawyer trained at the University 
of Viginia, with his undergraduate degree from Yale. 

Duke spent several years with the law firm of Covington & Burling. In 
1977, he became executive deputy director of the New York State Office of 
Health Systems Management. In July 1979, he assumed his current position 
as the deputy administrator of HCFA. 


MR. COLLIER: It is fascinating, at least to me, that the podium has 
Orsini and Werner and all of us fresh from New York, and Ed made a point of 
that and it was not to be taken lightly. 

If we are at a time of constricted resources, as I believe we are, then I 
think the best laboratory for study is New York State, which ran out of money 
sooner and more dramatically than anyone else, and the responses to which I 
think should tutor us more than any other. 

This session is the most problematic of the sessions. This morning was 
what everyone came to hear about: what are you going to do to us, et cetera. 
This one is a little more problematic, but I think it is the most interesting 
session, potentially. 

First, I'd like to give you some of my perspectives. Gas prices provide 
a lesson for our times in some ways. It is the most fruitful analogue to 
me. In the late 1960's, early 1970's, even before the boycott, GM had 
thought to redesign its fleet and retool its factories in order to produce 
smaller, lighter and more fuel efficient automobiles, and at a cost of many 
billions of dollars, and in retrospect, if you're fair to them, at some 
corporate risk, they did that, but Chrysler did not. I think the compansions 
today are fairly striking in terms of the success of the one corporation as 
opposed to the other. 

In Europe, where gasoline has cost a good bit more for some time, the 
fleet economy, miles per gallon, is close to 30 miles a gallon, and I think 
I say that simply because the Europeans still drive around, although in 
somewhat smaller cars, and they even tend to drive around a little slowly. 
We'll always drive around here, too, I think, although more and more in 
Citations and less and less in Cadillacs. 

I think that is true with respect to health care. We are going to 
continue to drive around, but my guess is that the boom days of big time 
tertiary medical centers are somewhat behind them in some respects, not 
all, but it will not be possible for everyone to have a Cadillac in the 
neighborhood. Indeed, I think it is increasingly the case that acute insti- 
tutional care is going to be evolving substantially and become less of a 
factor for all of us. 

I want to come back to that theme because I think that has major implica- 
tions to you all and I want to talk about it specifically in terms of primary 
care and long term care. 

If the New York situation is of any use, it seems to me that what has 
happened up there is that under pressure from the limited budget that the 
State and city have, if Medicaid has begun to pay less, in all likelihood 
it has not been so much at the cost of Medicaid patients -- in the sense 
that it appears that Medicaid is still carrying its own load. There is 
some controversy about that, but what's happened is that in the Health and 
Hospitals Corporation, in Brooklyn Jewish, and in a number of other situa- 
tions that have come to the brink of bankruptcy, it has isolated problems 
in those institutions which were always able to be sloughed over before, 
problems attributable to poor management in some parts, problems attribut- 
able to patients who have no coverage but whose coverage could always be 
subsidized out of excess revenues from the people who were covered in the 
past, but that can no longer be cross-subsidized. 


It seems to jne that the lesson there is readily available -- that is 
going to happen more and more as Federal government expenditures, on a per 
beneficiary basis, decline as they inevitably have to, at least as against 
inflation and the rest of the economy. They have to decline in some respects 
because we are under such pressure to spend more money for more people. CHAP 
would add, I think, two million people to the rolls. The National Health 
Plan, it's not clear -- 15 million I think the Under Secretary said, although 
the estimates vary. Just in terms of coverage, estimates would vary, but a 
National Health Plan would take our expenditures in today's dollars from 
somewhere in the $50 billion range perhaps to 70-75, perhaps even more, 
depending upon exactly what components were introduced. Most of that money 
would not be for enriched benefits for any present beneficiaries; it would be 
for additional beneficiaries, and so forth. 

So, I think we really need to look at retooling; we need to make our 
cars a little smaller and get a little more mileage out of them in order to 
make these programs go along better. 

How are we going to do this? It seems to me that is obviously the one 
essential issue. A number of techniques seem available at the moment, and 
I'll just touch on them for what they are worth and, hopefully, we can 
discuss them some more. 

Prospective reimbursement, as a device for controlling with a greater 
degree of certainty, expenditure levels, certainly is on the horizon, and 
many of you may operate in States where it is already available as a technique 
for at least Medicaid. 

We have experiments now -- some of them well beyond the experiment 
stage — in New York, New Jersey, Maryland, Massachusetts, Washington State, 
and western Pennsylvania. We anticipate applications in short order. I think 
they've already arrived from California, possibly from Illinois. I think we 
have recently approved Idaho. 

If you think of it in terms of the Medicaid expenditures that are 
covered by those States, you don't have to add Michigan, Ohio and Pennsylvania 
before you've really got the bulk of the Medicaid expenditures. 

And Medicare, which is already participating in New Jersey and Maryland, 
will follow soon behind. 

The next thing that will come, I think, as we gain facility and control 
of expenditures, as pressures are put upon us on the budget front, will be 
less willingness to continue cross subsidies, particularly with medical 
education and research and secondarily, I suppose, of other patients. Also, 
in New Jersey and in Maryland to some extent, we have explicitly contemplated 
the possiblity that funds saved by the prospective reimbursement technique 
could be reprogrammed for purposes of taking care of indigent patients. 

Certainly the cross subsidy issue will become much more explicit, much 
more on our minds, as we move into prospective reimbursement systems that 
rest upon uniformly gathered and uniformly massaged information. 


With regard to other techniques, Lou Orsini certainly highlighted one 
which would be that of more controllable reimbursement techniques with 
planning goals and planning processes. Again, New York is instructive in 
this respect. I had the pleasure of signing the letter, in my old job, to 
St. Luke's and Roosevelt, in which the New York State Health Department 
agreed to abnormally high or higher than what would otherwise have been 
available reimbursement rates for the merged institution, based upon their 
assurances with respect to the combined budgets, pro forma budgets, of the 
merging institutions. The same was true with Buffalo General Hospital and 
Deaconess in Erie County. In the case of Buffalo General, they offered us 
pro forma budgets for the two institutions that were three percent in excess 
of the budgets for the previous year, and the promise that the budget for the 
following year, 1980, would be at about the same level of increase, perhaps 
five or six percent. 

My understanding from Buffalo General — just recently, not yet audited 
— is that in addition to that -- over the top of that rather modest cost 
increase of three percent, the combined institutions -- without significant 
program changes, I might add -- were able to save an additional $700,000 or so 
in the first year of the merged operation. 

We have regulations in circulation within the Department at the moment 
which would allow Medicare to become party to similar kinds of arrangements; 
that is, party to closure and coversion of merger type situations, which we 
would be willing to pay somewhat enriched rates in order to eliminate 
obstacles that might otherwise exist to desirable planning goals. 

One of the other things you might want to keep your eyes on is of 
extreme interest to the Department, and that is the Bedford-Stuyvesant 
demonstration proposal m New York City. It arrived on our doorstep in the 
fall, and there has been a tremendous amount of controversy that surrounded 
the Brooklyn Jewish Hospital, which had been in Chapter XI for some time 
and which was faced with closure, the State having propped it up to some 
extent, over time, with direct subsidy and somewhat of an enriched Medicaid 
payment. The Department was sought out as a saviour of that hospital and a 
great deal of pressure was put on us. 

We felt, looking at the service area which encompasses the Crown 
Heights-Bedford-Stuyvesant area, that there were many desirable aspects to the 
continuation of the Brooklyn Jewish, St. Mary's Hospital, St. John's Episco- 
pal, and a number of clinics in that area, and some desirability in trying to 
get them together so that some of the problems they were facing could perhaps 
be resolved better through planning. That would perhaps wind down the same 
degree of inpatient care as has been available m that community m the past, 
increase the number of clinics, increase the number of doctors; in short, do 
all those sorts of planning things that people talk about rather faciley at 
these kinds of meetings. 

Recognizing that you can talk a long time about health planning, much as 
the weather, but very seldom do much about it, we decided to hook our reim- 
bursement programs up to it and make some money available to them if they 
would do the things we wanted, and take that money away if they wouldn't. 
Recognizing further certain limitations in our vision of the future in the 
sense that the configuration of health delivery in any given community has to 


be very much a matter of local demography, practice patterns, what have you, 
recognizing that it is a highly political process, recognizing that it is 
impossible to impose solutions from top down even if we had them, we contented 
ourselves with putting in place a rather rigorous negotiation structure, a 
framework, in which we and the other payors would be negotiating over the 
period of the demonstration with the hospitals brought to the table as an 
incorporated group, again with the carrot and stick of our reimbursement 
available or not available. 

I think it is a very interesting program. I hope that you will pay 
attention to it as it goes along. But, again, it is simply another example of 
our increased involvement, the reimbursement program's increased involvement 
with matters of health planning, matters of shaping the array of the delivery 
system. It has the possibility of offering us some techniques for achieving 
some of the goals that I think are going to be upon us. 

I'll just touch on a couple of other things. It is quite clear that 
staffing policies, Federal staffing policies, have made a tremendous differ- 
ence in the way in which services are delivered, and it is equally clear that 
those policies are in a state of flux and will be undergoing change; whether 
the issue is money for the training of doctors, the introduction, through our 
reimbursement programs as in the rural health program, of recognition for the 
paraprofessional , paramedical extender types of personnel, whatever, there is 
going to be substantial evolution in staffing policy over the next decade and 
it will have significant implications for our programs. 

Two more points: If we have a sense of direction, or at least of the 
pressures that will be on us, and of some of the things that need to happen; 
if we have a sense of some of the techniques that are at hand, what about the 
style in which we'll be proceeding? I think no particular promises are 
available, but, on the other hand, certain things are inevitable and one is 
that we move slowly, we move incrementally. Global plans are hard to con- 
ceptualize and impossible to implement. It's not part of the deal in the 
constitutional scheme of things and never will be. 

So, I don't think we'll see too much happening very quickly. On the 
other hand, I think it's imperative that where leadership can be provided in 
the structuring of the dialogue, that it be provided. I think you all are at 
a point at which leadership can and must be provided. I think many of the 
trade associations have not done the job that they could do in providing 
leadership, and they're going to have to do it more. 

I think we have not done the job that we might do in providing leader- 
ship, but we are tyring to do it more. And if there is a promise of HCFA, as 
opposed to SRS and BHI, and so forth, I think it is that at least we have 
enough of an overview of the Federal programs to provide some sense of leader- 
ship from where we sit, and that will be something we'll try to do. But it 
will be a muddling through process, very incremental, a lot of demonstrations 
and experiments, and a lot of tries that fail and tries that succeed only 
partially. That's life. I don't think that is something to be pessimistic 
about; I think it is something to be optimistic about. At least there is 
ferment, at least there is movement. 

What are some of the implications of all the preceding for you all as 
contractors? The closure and conversion regulations in circulation in 


the Department may well have some hints there. You are us, and if these 
are goals, things that we're trying to produce, if you sign on with us 
and take our money to run our programs, then you are going to have to do 
what we intend and, with you, want done. 

The closure and conversion regulations call for the contractor, the 
intermediary in the community, to be our negotiators in these closure and 
conversion situations. Who should know better than you what are the sensitiv- 
ities of a given setting? 

It is the same thing with a State. When I was in the State, acting on 
behalf of not only the State but the Federal government, I actively partici- 
pated in negotiations between St. Luke's and Roosevelt, Buffalo General and 
Deaconess, New York Infirmary and Beekman Downtown, Brooklyn Jewish, Bronx- 
Lebanon. I think that is a role the States will have to play, and many are 
playing, and is a role that contractors are going to have to play. It will 
not be enough simply to pay the claims and operate at arm's length. I don't 
suggest that you've done that, but I think your role will be greater in this 
respect . 

Ed Werner pointed out that situations around the country vary substan- 
tially and solutions in the problems that arise, in many cases, have to be 
tailored locally. I agree with that and I think that, in our program, we have 
a peculiarly appropriate set up for doing that in the sense that we have so 
many contractors who are tied in and knowledgeable about the situations in 
their local communities. That is not to say that we don't want a certain 
uniformity with respect to many of the things that we do. 

A second implication clearly is that management is of far greater im- 
portance to us now than it used to be in the health care sector. The manage- 
ment of hospitals, the management of insurance programs, the management of the 
public agencies is the GM thing again: we simply have to be able to get the 
most out of what we have, the most out of our resources. 

I talked, both formally in deposition when 1 was working for the State as 
a lawyer, and informally over the months and years I was in New York, and 
sensed there are a lot of hospital administrators up there who are some of the 
most embattled individuals around. I don't think I ran up on very many who 
really felt that they were doing a good job of managing their hospitals, and I 
ran up on an awful lot of hospital administrators who pointed out to me that 
they could do a much better job. And indeed, in the New York situation, for 
the first time had been given that opportunity because now their boards were, 
all of a sudden, worried, were backing them up. 

I have talked to a number of people who have observed the health insur- 
ance industry for a while, and many of their comments about the management of 
health insurance programs have been quite critical. I am not an expert and I 
can't evaluate those comments, but it seems clear to me that the opportunities 
for better management are there. 

I think HCFA bespeaks the opportunity for better management of public 
agencies, and I think we are doing a lot to manage our programs better. The 
contracting initiative is an aspect of that, but there are many aspects that 
run far deeper m terms of the 4500 immediate employees of HCFA that we could 
spend some time on. 


In any event, that is an implication for the future for you, and I think 
issues of uniform reporting and uniform data and so forth are simply just 
aspects of that. 

I've really gone on a bit longer than I had planned. I hope the comments 
I've made will get some juices flowing and people will start talking. It 
seems to me that we have one of the great luxuries of people who have to work 
for a living, which is that we have work to do which is fairly interesting, 
which matters, in some sense of the word, and that could not be more glamor- 
ous, at least in the sense of the interest that people take in it. 

I've been struck, since the early days of my Medicaid litigation experi- 
ence, that I couldn't fly on a plane, look at a television set, ride on a 
railroad train, whatever, without someone reading something about one of our 
things, without turning open a magazine and seeing something, without hearing 
people in the seat behind me talking about it, employed in it; it's an abso- 
lutely pervasive and interesting complex social issue, so I think that at 
least we can take some comfort in that. 

MR. FOX: Before opening up to comments and guestions, I'd just like to 
discuss three pressures that I think are critical to understanding the likely 
events of the next decade. 

The first one, as Duke alluded, relates to staffing resources planning. 
We've talked a lot about the need to essentially bring together, at least at 
the local level and also at the Federal level, reimbursement with facility 
planning, but we haven't talked much about bringing reimbursement together 
with staff resources planning. I would submit that the great inflationary 
pressure of the next decade will come less from the third party payment 
structure than it will from the expanding supply of staffing, particularly 
physicians, generated in large measure by Federal policies. 

To give you some idea of the magnitude, in 1965 less than 9,000 students 
entered medical school. This year more than 18,000 are entering medical 
school. If you project that out over a 30-year period, you indeed get a 
doubling in the supply of physicians. 

If, in fact, doctors can, in large measure, generate demand for their 
services, then the inflationary impact, the impact on aggregate expenditures, 
IS going to be enormous, and we are likely to see an increase in the share of 
GNP going to the health sector from roughly nine percent today to something in 
the 12 to 15 percent range within a few years. 

The impact of the process, on the system, of political response, will 
likely be profound. 

The second issue I'd like to raise is -- and it is going to drive some 
people up to the ceiling, I can guarantee it -- how much money can we afford 
to take from the pockets of working people and put into the pockets of the 


Let me give you some numbers. Everybody has been concerned with Medicare 
going up at roughly 15 percent a year. In June, Social Security cash benefits 
will go up by 13 percent a year, and there will be a further increase in the 
Social Security cash program similar to that in Medicare, as a consequence of 
adding 600,000 people to the rolls. As a result, roughly 15 percent increase 
in cash programs, along with the 15 percent increase in Medicare, is being 
financed through an eight percent increase, give or take, in wages. At some 
time, this is likely to cause enormous social tensions. 

Again, where those tensions will lead us, I'm not going to say. 

The last comment which, again, comes back to some of the other remarks, 
relates to data. I think everybody agrees that we will have a more planned 
and managed system. That isn't to say that the Federal government is going to 
do the planning or managing, although, hopefully, we'll do a better job at it, 
but it will be more planning and managing at the level of State and local 
government planning agencies and at the level of the individual institution. 

The role of the administrator of hospitals is changing. There are more 
health maintenance organizations coming along, all of which are managed 

The greatest source of data rests with the payment process. That data 
was set up to pay the bills with very little more in mind, and there is going 
to be increasing pressure — we see it now — to change the data collection 
mechanism to do more than simply shovel out the money. Again, how that will 
play out, I don't really know. I also do not know what the data will look 
like, whether we have sophisticated planners around to use the data, or 
whether we can make the transition from a claims payment process to a manage- 
ment process. 

At this point, having heard three very excellent presentations, I'd like 
to open up the discussion to the floor. 

MR. MARKSGN: I'm David Markson from Blue Cross of Greater Philadelphia. 

I was wondering about what appeared to be possibly a conflict of objec- 
tives and goals. We listened today as Mr. Schaeffer described a program, a 
model, which I guess, if fully implemented, would produce, through the combi- 
nation of A and B and the use of the larger geographic areas, by and large 
much more complex, larger and more geographically dispersed contractors. 

This afternoon, I heard this panel — Mr. Collier, Mr. Werner, and others 
-- describe the important role of the local contractor in relationships with 
providers of all types, institutional and otherwise, and relationships with 
the individual communities, to produce local goals. It occurs to me that 
unless this process is carefully and cautiously managed, these goals could be 
moving in different directions, and I was wondering if you, Mr. Collier, or 
any member of the panel may have some light to shed on that issue. 

MR. COLLIER: I don't have any light to shed on the final conclusions. I 
think that, philosophically, it's an interesting issue, the competition — the 
notion of Federalism in our society, competition betweeen local concerns and 
centralized concerns. In terms of our programs, I think that we don't now 


know; we have some ideas but we don't have a final conclusion, and I think 
we've tried to stress that all day, as to what would be the optimal workload 
for a contractor, what would be the optimal geographic arrangement for a 

I think we feel that program administration would be improved by adjust- 
ment in the number of contractors, downward, the readjustment of the workload, 
but I don't think we have a final conclusion as to numbers of claims, numbers 
of provider service, numbers of square miles covered, if you will, at this 
point. It seems to me that's probably not an analysis that is able to be done 
in the abstract, in any event. Situations vary tremendously. It is sort of 
like trying to figure out what is the right sized unit of government for 
maximum economies of scale and all these discussions of the Toronto system and 
sewer districts versus educational districts, decentralization of this and 
centralization of that, really probably haven't led us anywhere, although I 
did have a friend, who is a social scientist, tell me once that the optimal 
size of a city was 250,000, so at least I've been able to cling to that over 
the years. Of course, his insight doesn't seem to have helped any in setting 
up cities, but it is nice to have the comfort of certainty about something. 

So, I don't have a lot of conclusions. In a fairly large State, with a 
lot of people and a lot of miles to cover and some rather disparate terrain, 
demographically and socially and what have you, I felt that if the State 
government was able to be reasonably sensitive to the disparate needs of the 
people served, that at least there was some homogeneity with respect to the 
traditions of the State, we didn't have too much discomfort dealing on any 
given day with Buffalo, Rochester, Glens Falls and Manhattan. I don't know 
how to respond other than to say that I think that the issue is an important 
one. I don't think that Federalization of these programs, a centralization in 
Washington, makes much sense, but other than that, I haven't reached any 

COMMENT: It seems to me the points you made draw out very starkly the 
difference between the role of the insurer, as simply a claims processor or as 
part of the health care system. There's an opportunity out there to demon- 
strate that the difference between policy at the Federal level and the way in 
which it is handled at the local level is going to be directly influenced by 
the degree to which we can maximize our consumer advocacy role in the process. 

By that I mean that there is need for informed judgment when you discuss 
how the planning process changes. There is need for informed judgment if you 
are sitting in a State where there is a rate review commission that is drift- 
ing in the direction of being dominated by the provider or drifting in the 
direction of being too arbitrary. 

There is need for informed judgment in developing the kind of incentives 
in the reimbursement system so that the hospital that has been generating or 
maximizing revenue by playing the utilization game faces a pragmatic incentive 
to live with a revenue cap, and living with a revenue cap independently 
arrived at has a pragmatic incentive to let utilization drop to its normal 
level and thereby maximizing profit and reducing expenses. 

So, I think that the opportunity is there and I think if we limit our 
sights too narrowly, that clearly the role of the claims processor has 
limited potential. 


MR. WERNER: I don't know what the optimum size of a city ought to be, 
Duke, and I won't sit here and say that precisely the number of intermediaries 
and carriers you have at the moment is the right number. I'm sure it isn't. 
I'm not sure whether I think it ought to be more or it ought to be less, but 
I'm sure of one thing, that the answer to Mr. Markson's question has its roots 
in what you expect the contractor to do. 

To the extent that you want the contractor to play a role in the inter- 
face with individual situations, with reimbursement implications, with impact- 
ing on the delivery system, with mergers of institutions, with the movement of 
patients from one setting to another, with the way physicians practice, then 
there's a great deal to be said for the local familiarity, the relationships 
that have existed over many years. If you are really talking about the broad 
role of what I believe the contractor ought to do — and one can fault some of 
us who may not have done as much about this as we were expected to do -- some 
will say that much of that initiative has been taken away from us. 

With all due respect, I think there are significant differences between 
New York City and upstate, and not everybody is a Duke Collier who can move 
from one of those environments to the other and deal with them effectively. 

But, if all we are talking about is pushing paper, if all we are talking 
about is pushing something into a machine and taking what comes out of it and 
putting it in the mailbox, then you've got one kind of an issue. On the other 
hand, if you're talking about impacting on the system and using the resources 
those contractors have available to them that can be of sevice to the Medicare 
program, then it seems to me that one has to pay some attention to those local 
relationships and protect them as best you can; m concert with good, effi- 
cient administration and reasonably balanced across the board dollar value for 
the investment. 

MR. COLLIER: Let me pick up on those things, in the interest of some 
dialogue, because I think it touches on a point which, if we are playing our 
cards right as a conference, will suitably link this afternoon's session back 
to this morning's, to serve various pedantic purposes there. Bob. 

It seems to me that one of the insights that we have had simply by the 
dint of our efforts once we got going on this is to recognize much more 
clearly, from a program management point of view, the disparity or the differ- 
ences in the functions of the contractor. Clearly, claims processing is much 
different from A&R, much different from provider and beneficiary relations and 
much different from medical review. It seems to me that we haven't fully 
explored for ourselves — though we now want to, and that was a point we tried 
to make this morning -- what are the implications of that difference for the 
way in which we do business. 

It is not inconceivable that we may want to enter into different kinds of 
contracting modes. Certainly we want to approach the contracts differently 
for claims processing than for, for instance, A&R. 

One of the interesting things to me in one of the PMIC discussions was 
Joe Connor from Price-Waterhouse, who wasn't here today, represented by Jack 
Buelt, talking about the freight forwarding business, which had for years had 
a fairly substantial auditing problem and which has generated a whole industry 
of people who have a specialization in the auditing of freight forwarding 


activity. It seems to me that, implicit in some of the work that we have been 
doing — and I hope now, from this day forward, explicit — is that we are 
open to a lot of conversation and a lot of thought about that kind of 

It does not seem to me inherent in the scheme of things in the world that 
A&R has to be done by the same contractor who does claims processing, nor 
does it seem to me inherent that we need to have a single contract, once for 
all time, with everybody for everything. 

Those are issues, those are open issues. That's the kind of issues that 
simply has to be debated, issues as to which principled people can disagree 
and have something to contribute. 

So, I think that if there is a lesson out of this afternoon's or this 
morning's discussion, it is that the evolving role of the contractors will 
substantially influence the way in which we approach our relationships to the 
contractors. Competition is one catch-all for that, but it is simply one. I 
think there is a sort of whole functional set of relationships which go beyond 
the selection of a contractor and go really to the issue of defining the work 
the contractor is going to do and figuring out how to select and how to pay 
that needs to be very much on our minds as we move along. 

MR. ALLEN: I'm Paul Allen, the director of the Medicaid program from the 
State of Michigan, and one of my official ad hoc duties is a member of 
the State Health Coordinating Council, which is part of the grand health 
planning system of this nation. 

In the past two years, we've turned out a health plan for the State 
of Michigan that weighs about six pounds. This document, to me, is the 
idealistic translation of the national health goals into Michigan health 
goals. It tries, in each area, to speak to the things that you gentlemen 
talked about this afternoon, and some of the goals. Of course, a planning 
process says you have to come up with a blueprint to do something, if it is 
going to be worth anything, and this blueprint does things that are most 
frightening, and once you've got a plan, as we have, and then try to implement 
it, that's when the trauma starts. 

Now, let me give you a specific. Health manpower: We have three schools 
of medicine and one school of osteopathy in our State. We have decided that 
we're putting too many physicians through these four schools, so now we have a 
quota system established. Statewide, on the number of physician candidates we 
will allow into these schools. 

Now, that has just hit the fan in the past six months as we've exposed 
the plan to the legislature and the public. But it is a perceptible movement 
in the right direction, and I'm just illustrating it because that's the only 
way it is going to happen nationally. You made the point about demographics 
and local needs, and this really hits home with that point. 

Related to it, we've also come up with an excess of 3,800 hospital beds 
in the State of Michigan that have to be reduced, without replacement, m the 
next five years, and we specify that 2,600 of them have to come out of 
Detroit, which is our New York City and Illinois' Cook County. Now the 


question is whose 2,600 beds and, in Detroit, which brings out spiritual 
aspects of health care because we have the Catholic hospitals, the Methodist 
hospitals, the Jewish hospitals, the Lutheran hospitals; it brings out the 
racial aspects of health care: the black hospitals, the white hospitals; it 
brings out the professional aspects of health care: the osteopathic hospi- 
tals, the M.D. hospitals; and it brings out the demographic aspects of health 
care: the inner city hospitals, the urban hospitals, the suburban and the 

So, we are facing the whole spectrum, and I'm just exposing you to this 
because I think we're going to have to start the planning process at the top 
-- identify national goals and objectives, a blueprint, if you will — with 
not too many specifics and then demographically flush that out in each State 
and in each municipality in this country. 

To do otherwise, I think we are just going to wander around the issue, 
and I think we are making process in that direction, but it is going to take 
time, and as mentioned earlier, we are not going to do it overnight. But I 
think it is wonderful that we should be exposed like this. 

I dream about this. I'll bet you I go to two meetings a week where we 
talk about these issues, and I find myself going in ever tightening circles 
because the options aren't many. But the course becomes clearer after a 
while, and I think we are all beginning to head in the right direction. 

QUESTION: I'm fascinated with the quota on the four medical schools. 
From what does the planning process in Michigan draw its authority to impose 
those quotas? 

MR. ALLEN: The public will, just the democratic process in Michigan as 
it is in the rest of this country. The only way you can express public will 
once you've got a plan is to get the public to endorse that plan, and then get 
legislation and other coercive aspects of the democratic process at work. 

QUESTION: In other words, the quota system is not in effect at the 

MR. ALLEN: No.* 

QUESTION: It's recommended by the planning process? 

MR. ALLEN: Right, and that, in turn, of course, translates itself into 
how much money do you subsidize these schools by to produce certain output. 

MR. OSIGIAN: I'm Barry Osigian, from Pan American Life Insurance 
Company. I have heard a lot about planning today and some of it directs 
itself toward competition, which is a good idea to a certain degree. Too much 
competition, it has been admitted, might narrow the field down to a few giants 
and that wouldn't be good. We've talked about merging hospitals, which is 
going to attack, to some degree, the three percent administrative costs, but 
the 97 percent of the program outlays hasn't been approached at all. 

Hospitals don't deliver medical care and contractors don't deliver 
medical care; physicians deliver medical care. I think we should be trying to 
figure out a way to engender some competition among physicians. 


MR. COLLIER: Well, you have here at the table, in Mr. Fox, one of the 
world's leading experts on that topic and specifically on the issue of group 
practice, HMOs, et cetera, — at least the first forum that we've hit upon for 

MR. FOX: My own view of that is that in some sense I would agree with 
you that we do need to expand or to change, if you will, the kinds of competi- 
tion among providers that now exists. You're right in that currently there is 
plenty of competition. Hospitals compete against each other to see who can 
get the latest technology; the payors, in some sense, compete against each 
other to see who can pay doctors the most, because any payor who isn't in that 
ball game is hurting the beneficiaries. 

So, we have plenty of competition. The guestion in my mind is not the 
existence of competition, but the nature of the competition or, more broadly, 
the nature of the financial incentives. 

One solution that has been advocated is promotion of prepaid group 
practices, HMOs or other forms of prepaid group practices. Personally, I'm 
all for it. I've been the lead for the administration in pushing for changes 
in the Medicare program for the way in which we reimburse HMOs — but it is, 
at best, a very, very partial solution. We're going to have to learn to live 
with the present fee for service system and to modify it at the margin, and 
start to build in some combination of restraints and incentives into it. 

I just do not see competition as it has been advocated by some, as 
anything approximating a cure all. I also believe that regulation and admini- 
strative measures work best when they are consistent with the financial 
incentives that exist. It is easier to divert a stream of water that is 
going downstream rather than trying to take that stream of water and make it 
go uphill. So, I don't view competition and regulation as necessarily contra- 

One last point: not that planning should take place mostly at the top, 
but planning takes place best when the top -- and, by this, I frankly mean the 
Federal government -- establishes our environment, through the reimbursement 
system, in which it can take place. Many of us have been wrestling with the 
question of how to bring together reimbursement and planning, not that the 
Federal government will do the planning, but that we need to be less at 
variance with planning at the State and local level. 

Let's face it, in some respects Medicare is a very good job creation 
program. At the local level, it may be more efficient to expand Medicare and 
Medicaid payments than it is to expand CETA, and we need to begin to look at 
how, through the Federal structure, we start to compliment the State and local 
structure so that the incentives are different. I view incentives, in some 
sense, as a broader word than competition. 

MR. COLLIER: Well, I'll just take this opportunity to embroider on some 

other themes that didn't hit the floor. I want to come back, Barry, to a 

point that I thought you made in your question, with which I disagreed -- 
maybe I didn't make myself clear. 


It seems to me that just as I agree with Peter that the HMO-IPA movement 
is a partial solution in terms of control of some undesirable aspects of 
physician practice, many of the institutional arrangements that we can encour- 
age are similar devices for control. Let me just point to two. 

I go back to the Buffalo General-Deaconess merger. The money that is 
being saved in that merger is being saved in a couple of ways. One is they 
are consolidating a number of services which both hospitals had which simply 
were duplicative. 

That consolidation necessarily involves management control over physician 
practice in those institutions. It's a slow process, and so forth, but if you 
talk, as I'm sure many of you do, to some of the operational managers in the 
holding company or central corporate entities of some of the larger propri- 
etary hospital chains, they don't feel, within limits, significant problems in 
disciplining physicians. 

A third example, a major teaching hospital in New York City, under 
financial pressure, nothwi thstanding a fairly large endowment, hired an 
administrator basically to put it on a sounder basis. He started, obviously, 
with the routine areas and got housekeeping in better shape, and purchasing, 
and all that sort of thing, but he then moved on to ancillary. He hired a 
couple of consulting firms to help him analyze physician practice patterns, 
particularly with respect to resident and intern practices; began a series of 
strictures with respect to test ordering by residents and interns, requiring 
supervising physician sign offs; forbidding certain things to be ordered by 
residents and interns, moving on again with something incremental, and so 
forth. I would suggest there is very much available to the administrator who 
has the proper backing in the proper environment. 

I see that sort of thing happening. One of the more distinguished 
members of our audience said to me during the break that the decade of the 
1980's is the decade in which the docs will give up. He may be right, I don't 
know, but it certainly will be a decade in which the lot of the doctor and the 
role IS substantially altered, it seems to me. 

Well, keeping you warmed up, I want to make one more point because it is 
just great to have this microphone and this audience, and these are important 

If you don't know much about long term care, learn about it. It is a 
matter of extreme importance, and it will be a matter of consuming importance 
in the future. 

Now, most of you have been off the hook because Medicare doesn't buy very 
much of it. Medicaid buys it, so the leading experts in the room on that tend 
to be Paul Allen, because he runs a State program, and me because I used to 
run a State program and spent more than 50 percent of my time and, I can tell 
you, more than 50 percent of our budget on long term care, and a lot of things 
are happening there that will have, I think, significant implications. 

For instance, there is, I think, going to be substantial pressure to end 
what in Medicaid has begun to be a fairly large f ict ionalization of the 
program. We now have in Medicaid, as you may know, the personal care option 


in which Title XIX programs for health care services are being used for 
nonhealth care delivery, delivery of homemaker and other kinds of services. A 
number of our demonstration programs around the country have allowed, on a 
waiver basis. Medicare to pay for nonmedical activity delivered to benefici- 

The pressure is on now for that to be expanded significantly and for it 
to be expanded in a way that doesn't depend upon fictionalization, as I say, 
of XVIII and XIX. I think you can look for Packwood to introduce Title XXI 
shortly; Waxman and Pepper have already introduced the Community Services or 
Health Services Act in the last couple of months, and the drift of these 
things is to create substantial funding streams for the maintenance in the 
community, sometimes in institutions but more often in homes of individuals 
who are chronically impaired, typically elderly people, but who don't have 
health as their central problem; their central problem is just going along and 
doing what they need to do every day, having housing, food, some help in 
getting around and, when necessary, medical care, therapy and rehab services, 
and so forth. 

I think a lot of the money for that activity will be reprogrammed out of 
XVIII and XIX, over time, and depending on how things go, we may have a role 
in that or we may not. We'll always be, I think, significant funding streams, 
but we'll certainly have to have some allied role in which we, either through 
devices such as channeling agencies or working through interweaving layers of 
administration, perhaps State governments, we'll have a role in this activity. 
Medicare is going to be more and more in it and you all are going to be more 
and more in it, and it is probably more than acute care going to be the issue 
for the 1980's for discussion. 

And, so, I urge you to pay some attention. And there are a number of 
States doing some interesting things. Paul can elaborate, but they haven't 
added a nursing home bed in Michigan in five years, I think he told me, and 
they now have more people supported in community settings -- that is, non- 
institutional settings -- than they do in the institutions, with a variety of 
techniques which include supplementation of SSI, use of Title XIX monies, and 
so forth. These are things you need to know about, and I urge you to learn. 

MR. WERNER: In the interest of stimulating a little more dialogue, there 
is one issue that I feel strongly about that hasn't been identified when we 
talk about what is going to happen to health care and its cost in the 1980 's, 
and that comes under the very broad heading of health education and health 
prevention, what people can do to take care of themselves as contrasted to 
what the health establishment can do. 

We have people abusing themselves with drugs and alcohol, etc. Are we 
spending enough of our valuable dollars for that aspect of health, or are we 
only in business to try to prove what most people think is true, that no 
matter what I do to myself, there is a great big medical establishment out 
there to correct the problem that I created, as contrasted with attacking the 
problem at home from the number 1 point of view. 

MR. COLLIER: We are pushing this CHAP legislation very hard. It doesn't 
concern Medicare, obviously, because it has to do with children, but it is an 
interesting issue because it builds off the poorly functioning EPSDT program 


to move into a somewhat broader and more administerable program. The purpose 
is to take a group for whom it seems expenditure on prevention would go a long 
way in terms of avoiding care later on. CHAP basically would provide what 
EPSDT does, but in a more elaborate way, for screening and diagnostic work and 
followup and therapeutic activity when necessary, but it emphasizes issues of 
catching people early, continuity of case development and case management, and 
again, not so much focusing on the back end of things, but making sure that 
people, at a time of great vulnerability (whether in the prenatal, immediate 
postbirth and then first early years of life), are screened and taken care of 
and brought back in on a regular basis for being checked. 

At the other end of the spectrum, I think that it is just absolutely 
clear we have to get into that, but at the other end of the spectrum Roger 
Egeberg, who works with us and whose views I respect greatly, feels that the 
best prevention program for the elderly is continued activity, and it's not 
something that Medicare can very well address. I suspect that you will see 
more and more going on in that way, an attempt by society not so much to spend 
a lot of money on taking care of people who, through dint of inactivity, 
decline, but just trying to spend money to keep people out there for longer 
and longer. I hope that we will see that. 

I must say, in the meantime, Ed and any of you who are here from Blue 
Cross, that it hurts me greatly to have to feign some medical problem in order 
to get my physical checkup paid for -- or pay for it myself -- and I welcome 
movement toward at least that much prevention. 

MR. FOX: Let me just comment briefly, if I may. There probably are 
certain kinds of things that we can be doing in the preventive area that will, 
in fact, save money, and there is some empirical evidence -- a little wobbly, 
but nevertheless there -- that improved services for children will save 

But I would like to state what I call Fox's law. Fox's law is that the 
death rate is one per person. 

The implication of that is that people eventually get sick and they 
eventually die, and I would submit that prevention really should not be sold 
as an end in itself. Rather, it is to improve the quality of life or prolong 
it. But particularly when we get into the adult population, outside of a few 
things fairly simple like innoculations and maybe taking blood pressure, that 
there isn't a whole lot that can be done if the purpose is saving money. 




Erederick J. Malley, Jr. 

The Equitable Life Assurance Society of the U.S. 

Panel Participants: 

John Jansak 
Office of Standards and Performance Evaluation, BPO, HCEA 

John Berry 
Office of Quality Control Programs, BQC, HCEA 

Don Nicholson 
Office of Program Validation, BQC, HCEA 

Robert E. Rinehimer 
Pennsylvania Blue Shield 

Ken Schneider 
Health Standards and Quality Bureau, HCEA, Region VI 

William C. White, Jr. 
The Prudential Insurance Company of America 

MR. MALLEY: Our topic for discussion this morning is called "New 
Directions in the Quality of Operations." This presentation consists of 
three segments: one is performance standards, two is quality control, 
and three is the role of PSROs. 

I'm surprised to see that we have such a good attendance this morning -- 
I think it constitutes proof beyond a shadow of a doubt of your undying 
dedication and loyalty and commitment to the Medicare program. 

As to our panel for this morning -- you see we have a full table, 
not that we have less talent and are trying to overwhelm you with numbers; 
it's a talented group, that I can assure you, as you'll see for yourself in 
just a few moments, but it is because of the breadth of the subject matter 
that we are tackling this morning. 

We have this panel broken down into what I like to refer to as four 
presenters and two responders. The four presenters will be John Jansak, 
who will be speaking on performance standards; Don Nicholson and John Berry, 
who will be talking on quality control; and Dr. Ken Schneider, who will be 
speaking about PSROs. 

The two responders will be Bob Rinehimer and Bill White. They haven't 
had too much of a chance to prepare any comments in advance, since they won't 
know what the presenters are going to be talking about. 

We'll be starting off in the order of the individuals I just acknowl- 
edged. At the end of each presentation, 1 will ask our two responders if they 
have any comments to make with respect to the subject that has just been 
covered . 

1 will, at the end of the four presentations, call on both Bob and 
Bill, to ask if they have any specific comments of their own that they 
would like to make. 

When you get right down to it, we're dealing with meaty and heavy 
subject matter, but subject matter that is important and very critical to 
us as contractors and, m a large measure, may determine whether any of 
us remain in this program. It is in your own best interest, I feel, to 
find out what is being developed in these areas, particularly performance 
standards and quality appraisal, and if you have any doubts or questions, 
let's get them raised this morning. Bring them up while we have the experts 
here, and don't walk away saying you didn't have an opportunity to find out 
what was going to be done to you. 

Rather than giving some background on each individual before he makes his 
presentation, I'd like to exercise the prerogative of the chair and very 
quickly give you a short rundown on each of the presenters. 

Kicking off this morning on performance standards is John Jansak. 
John has been with the Department for 24 years. He presently serves as 
the director of the Office of Standards and Performance Evaluation. Of all of 
the gentlemen on the panel, John is the one that perhaps needs the least 
introduction. Anyone who has had the opportunity to go to Baltimore over the 
years, I'm sure has had occasion, for one reason or another, to meet with 
John . 


John, in his present position, directs, as I said, the Office of 
Standards and Performance Evaluation, and this office is responsible for 
the development and implementation of State agency and contractor performance 
under both Titles XVIII and XIX of the Social Security Act. 

John is a graduate of Brooklyn College and holds a Juris Doctor degree 
from the University of Maryland Law School. 

The second presenter will be Don Nicholson, one of our pinchhitters, but 
a very able pinchhitter. Don is the director of the Office of Program 
Validation. He has been involved in various capacities in the health care 
financing field since 1967. He has had experience working in both Medicare 
and Medicaid and, for nearly two years, he worked in the Office of the Secre- 
tary of HEW. His experience also includes one year in the private sector 
where, I understand, he was in the executive interchange program with, I 
believe. Employers of Wausaw. There he was involved in industry marketing and 
managing of health maintenance organizations, a subject close to many of our 

Don has been in his present capacity since 1977, where he manages a 
program designed to discover problems of Medicare and Medicaid program 
abuse. Don tells me that he is a graduate of a world renowned university 
called Transylvania University, and that everybody in the room would know 
where it is. 

The next presenter will be John Berry. John is the acting director 
of the Office of Quality Control Programs. John has been with the Department 
for six years. During that six years, he has served in a variety of manage- 
ment positions, not the least of which was as director of Management Systems 
here in the Dallas regional office, working with State agencies as a con- 
sultant on management problems. 

He, too, was a participant in the President's Executive Exchange Program, 
and in that capacity was involved with financial analysis in the private 
sector. Most recently, he has been involved with Medicaid and now Medicare 
quality control programs with responsibility for design and operation of 
formal quality control programs covering both payments and service delivery. 
John is a graduate of Northern Illinois University. 

The last of the presenters is Dr. Kenneth C. Schneider. Dr. Schneider is 
a graduate of St. Peter's College in New Jersey. He is also a graduate of the 
New Jersey College of Medicine and Dentistry and a graduate of the Tulane 
School of Public Health and Tropical Medicine. 

He presently serves as director of the Office of Health Standards 
and Quality for HCFA in Region VI, which is the Dallas region, and he has 
served in that capacity since 1977. A very active young doctor, he also 
serves as an adjunct associate professor for the Department of Health Service 
Administration at Tulane University School of Public Health and Tropical 
Medicine in New Orleans, and clinical assistant professor in Environmental and 
Community Health at the University of Texas Southwestern Medical School in 

Dr. Schneider has a number of memberships; among them are memberships in 
the American Medical Association, the American Public Health Association, the 


American College of Preventive Medicine, and the American Academy of Family 
Physicians. He is licensed to practice medicine in three States: Texas, New 
Jersey and Louisiana. 

Turning now to my two cohorts from the private sector: Bob Rinehimer, 
who, since 1970, has been the president of the Pennsylvania Blue Shield, which 
is the nation's largest Blue Shield plan. In addition to his responsibilities 
at Pennsylvania Blue Shield, Bob serves as vice-chairman of the Board of 
Directors of the National Blue Shield Association, as well as serving on its 
executive committee. 

He is a prominent spokesman, nationally, in the health care field, 
and was one of two representatives from the insurance business -- the other 
being Morton Miller, from my company — who were appointed by the former 
Secretary of HEW, Joe Califano, to serve on a member advisory council that 
conducted far reaching inquiries into the problems of financing health care 
services in the United States and Canada. As 1 recall, the name of that group 
was the Advisory Committee on National Health Insurance Issues. 

Bob IS a graduate of Lafayette College. He did graduate work at the 
University of Pennsylvania, and also at the University of Michigan and 
Syracuse University. 

Last, but far from least, is my associate of many years. Bill White. Bill 
White became (in 1973) vice-president in charge of the Prudential Insurance 
Company's Governmental Health Programs Office, headquartered in Millville, New 
Jersey. In that capacity. Bill is responsible for the administration of Parts 
A and B of Medicare m New Jersey, Part B in North Carolina and Georgia, as 
well as Prudential's administration of a major part of New Jersey's Medicaid 
program. Bill is graduate of Milliken University and also did graduate work 
at the Illinois Institute of Technology and the University of Chicago. 

I hope Bill will forgive me for mentioning that he is one of those 
that we in the commercial end of the business feel we have salvaged, 
because before joining the Prudential in 1958, he served m management 
positions with the Wisconsin Physicians' Service and also the Illinois 
Blue Cross/Blue Shield plan. Bill is one of the vanishing breed (of which I 
also happen to be a member) in that Bill was one that was asked, back in 1965, 
by the Social Security Administration, to serve as a member of one of the 
advisory task forces to assist in the implementation of the Medicare law. 
These task forces developed all of the original rules and operating instruc- 
tions for the Medicare program which, as we all know, began on July 1, 1966. 
Bill has also served as a member of the Secretary of Health, Education and 
Welfare's task force on Medicaid and related programs. 

We'll be starting off with the first subject -- performance stand- 
ards, handled by John Jansak. As I said earlier, this is an area that I 
think many of us, over the years, have all seen a need for, perhaps even 
dating back prior to the recommendations made by the Perkins Committee in 
the mid 1970's. Our only concern with respect to performance standards 
in the past -- and I feel that concern still exists today -- is that we 
want to make sure that the standards are realistic and meaningful. 

As we all know, we now have standards that have been developed for 
Part A. The standards for Part B are well along in their development, 
and these standards could have a very dramatic impact on us and our future in 
this program, as contractors. 


I will now turn to John to give us an update on where we stand with 
respect to the A standards, the B standards, and anything else that he 
might want to enlighten us on. 

MR. JANSAK: Today, in talking about standards, in particular 1 would 

like to talk about where we are going, but first 1 would like to talk about 

where we came from, the background, some of our rationale and why we made the 
decisions that we did. 

In contractor and performance reviews, 1 think it is important to 
understand our responsibilities to Congress, how to explain how the program 
money is being spent, are the taxpayers getting their bang for the buck, is 
the program running efficiently? So, we are always looking to Congress on 
what we are hearing from GAO, because that's who we have to respond to. 

On the issue of public accountability, that has driven and will continue 
to drive us in our various endeavors and particularly standards performance 
evaluation. It also drives us, on a parallel track, concerning contract 
experimentation. That is, can we do things more efficiently for the taxpayer? 
The evolution of the process — we started out early in the program with 
central office reviews, usually of a snapshot or team visit into a con- 
tractor's site. This provided certain expertise out of a one train group, but 
did not provide a continuity of review, and that was very critical to the 
evaluation process. 

Over the years, we shifted to providing regional support for the reviews. 
The reviews shifted from a snapshot to a look at the contractor through the 
whole year of operation. The on-site representatives were put in place to 
provide continuing dialogue between the program and the contractor, and the 
phase shifted from just a quick look to a long, continuum of evaluation. This 
we have kept in place today. 

Also, out of this procedure we developed the annual contract evalu- 
ation report, which is, in effect, a report not of a point in time, but 
of the contractor's performance during the year. 

Despite these shifts, we continued to hear complaints from various 
parties. Fred mentioned the Perkins Committee report. There were various 
points made by Congress, GAO, the contractors. There was an allusion made 
yesterday to the PMIC report to the same points; that is, there are variations 
in the performance standards required by the ten regions and there are also 
variations in the review process. 

I think the ACER process, in the past, has worked quite effectively, 
but there is some variation because of the extent and size of the country. 

Another way you can see this problem is in the AJJ issues that have 
been raised by the same group of people; on a macro scale, we were told 
to have more national uniformity of procedures and process, and on a micro 
scale, we had problems of different intermediary judgments regarding coverage 
or reimbursement within individual States. 


This leads us to our current process of establishing national standards 
for performance evaluation, and that provides also for a structured review 
process. Our current concept is essentially of two tiers; performance criter- 
ia and statistical standards. 

Performance criteria does assure basic program requirements are being 
carried out at an acceptable level. It is process oriented, but it is also 
oriented at assuring that the level of performance is equivalent in all 
contractor sites. It is also an opportunity for us to expand m the future 
and have better controls on program payout, not just the three percent 
administrative expense that we've been talking about, but the 97 percent of 
program payout. 

In a number of areas in claims processing and coverage, we've made some 
initial steps looking at program payout. One of the most important things we 
can do in the future is to look at how the criteria can help us control 
program payout; using the best ideas in terms of quality control, pre and 
postpayment screens, putting all these ideas together will be one of our 
future initiatives in terms of criteria, not only to control the operational 
policy, but also to look at the overall program. 

The statistical standards are quite a bit simpler to understand. 
They relate to processing time, to quality from the Part A CREP's cost, 
or from the Part B end of line. They also, of course, have the unit costs. 

Those of you who possibly are not familiar with them; both criteria 
and statistical standards have points above and below certain cutoffs, 
which provide an array vertically of superior performers and less than 
adequate performers. 

The essential features we see of both criteria and those standards, 
are that its results are product oriented rather than process oriented. 
For example, on interim payments, we provide a certain standard of per- 
formance, within plus or minus seven percent of the target. We do not 
look at how the intermediary, for example, establishes interim rates. 

Second, we believe the standards should be objective and quantifi- 
able. Third, they should be uniformly applied throughout the country. 
Fourth, the statistical standards are adjusted for noncontrol table 
variables affecting unit cost per claim, such as the volume, the mix, and 
the geographical wage differences. This is an attempt to level out the 
differences in the contractor's environment that he cannot control, and 
to take out especially those important elements. 

We also have a new feature which we have used in the past reviews, 
but have now incorporated in not only Medicare Part A and Part B, but on 
the Medicaid side; that is, statistically valid sampling methods and tech- 
niques. This is probably the most difficult problem for the regions to do. 
It is hard to get the samples in many cases. It is also very time consuming. 
But, in effect, it is the heart of the criteria process if the sample is 
derived in an objective way and, in fact, takes a review three or four periods 
of time over the entire operation during that year. 

Sixth, the entire program is issued to contractors before (when the 
standards are issued) the period begins. That is, up front, you know the 


program, you have the manuals, you know the sampling techniques that we 
use, you know what the percentiles will be, the targets for the upcoming 
year; therefore, you, the contractor, can in your own quality control environ- 
ments, maintain your standards at whatever level you decide to do. 

Seventh, and probably of most importance to us as a major objective 
in the future, not to utilize the standards as a minimum cutoff point, 
but to use the point systems that we can provide to rank the contractors 
and provide, m particular, bonus points to show the better than average 

We feel this will be an incentive for good performance and will drive the 
contractors forward, and together with the fact that it is up front, allows a 
very fair assessment of contractor performance. 

The expectations for 1981, I think you know -- Fred touched on the 
fact that the Part A standards are out and the Part B standards are in 
process now -- we'll begin consulting with the regions to make require- 
ments, based on their findings this year under the A program and the field 
tests under B; we'll also be talking with the contractor work groups in 
refining the packages for 1981. This will probably occur m June. Both the 
revised fiscal year 1981 packages would be issued before October 1st of this 
year. I say it is important because the substantial contributions have been 
made by the contractor work groups and they have aided us greatly in develop- 
ing these standards. But we rely on your knowledge and that of the ROs in 
carrying out this package. 

In the central office, we are not the experts on these reviews; it's 
the regional people and the contractors who know their operation and the 
techniques that we can use. 

At this point, I would like to thank each and every one of your organi- 
zations for the help and contributions. It has really made this work out much 
more easily than we expected, and I think it will work out fairly to both 
sides in this process. 

I'd like to describe how much conversation there has been on stand- 
ards among the contractors alone, as between the various work groups, TAG, FIG 
or CRG meetings. On Part A, for example, we've had at least nine meetings in 
the last year or two, five in 1978 and four in 1979. On Part B, we've had 
eight meetings; six in 1979 and two this year. 

This leads me to say that these meetings will not end; that we view 
the standards process as an evolutionary one, and that this dialogue, we 
hope, will continue. It's done at the working level, by and large, very 
effectively by knowledgeable technical people who have put a lot of time 
and spirit into the process, and I say this because of those standards 
that you see before you now that you have a problem with, unworkable standards 
will be eliminated and problem standards will be revised, and we'll come up 
with new ideas and techniques. 

We hope the B process is better than the A. We hope the Medicaid 
standards are better than the A and B, and we'll just rotate them to improve 
each in their particular perspective. 


One of the results of a standard process and point system is that we 
have an opportunity to fairly rank contractors. We are now working on 
methods of ranking performance on the both A and B, though, of course, 
the A is a little more progressed on both the criteria and statistical 

This essentially involves a weighting of various criteria, point systems 
and other mechanics which you will see eventually. We are just now drafting 
it, but we do hope that the process allows this to be somewhat more objective 
and more precise than in the future. 

The ACER process will also be objective and rely m large part upon 
the standard finding in the sampling techniques. There will be opportun- 
ity for the regions to comment on various areas of problems they have found 
that are outside the standards since the standards cannot encompass each and 
every activity. It also provides comment on the Part A side, for example for 
looking at a coverage process. We're also providing opportunity to look at 
HHAs as opposed to hospitals and as opposed to SNFs. 

Hospitals, for example, are 96 or 98 percent of the workload or dollars, 
in most cases, but we don't want problems, like in the HHA area, to fester and 
yet be covered up by an overall satisfactory with a hospital coverage review. 

We also intend that for the experiments we do in the future, to the 
extent possible, the standards will be part and parcel of the experiment. 
I think John Thompson mentioned yesterday the fact that in Maine we use 
the 60th percentile. It is an important philosophical question for us to 
decide in experiments, in particular, what level of performance can be 
expected of an experimental contractor. Should it be less than the rest 
of the community, should it be average, or should it be higher? 

That is an interesting point of contention. It has something to do 
with the price we receive, of course, but we do want high quality out of 
experimental contractors, as well as anyone else. 

MR. WHITE: Well, I guess, just an old chestnut that I've raised before, 
and that is the male professional salary index of 1969. Isn't there anything 
better than that, John, available? 

MR. JANSAK: A number of items were tested, female indexes, male indexes; 
the thought turned out, by the various statistical analyses, that was the best 
one available. We will try to get something that is more current, but it did 
test out to have the most influence, strangely enough. It has something to do 
with minimum wage levels throughout the country, which affect most of the work 
force, which reduces the differences and then the major differences are, in 
fact, a reflection of professional salaries. 

Probably in the future, a professional index composing both male and 
female probably will turn out to be the most accurate reflection on the 
locality. But I think the minimum wage levels is what flattens that out 
to some degree. 

If anybody has any ideas, we'd be glad to have them brought to our 
attention; we just haven't found what is more appropriate yet. 


MR. RINEHIMER: Mr. Chairman, I'd like to come at performance standards 
perhaps from a different perspective. Being a Pennsylvania Dutchman, I guess 
I can tell the story, although I'm told that an ethnic story should not be 
told from the platform. 

There was a city dweller driving through the countryside where the 
Amish are located, and he got lost. He hailed a farmer and said, "Hey, 
farmer, where does this road go?" The Amishman said, "I don't know." 
The driver then said, "Well, where would I go if I went back the same way 
I came from?" The Amishman responded, "Well, I don't know which way you 
came from." The city dweller then inquired, "Do you know where this road 
goes?," to which the Amishman responded, "Well, I've lived here forty years 
and it hasn't gone any place." Then this city slicker said, "Well, you're the 
dumbest, stupidest Amishman I ever did see." And the Amishman shot back, 
"Yes, but I'm not the one who is lost." 

Now, listening yesterday to the conversations, the discussions, and 
to what John presented this morning, I just hope we don't get the feeling 
that either HCFA or the contractors are lost. Sometimes it becomes mind 
boggling to me. In the early days, I remember, we were told to pay the 
damn claims and if we needed more money, we could get it. Well, we all 
recognized that sooner or later things would change, and they have. 

I think the development of the performance standards is the result 
of a natural evolutionary process. I'm glad to see that. We talked about 
competition yesterday and contracting strategies. We talked about competition 
among the providers, and so on, and yet, it seems to me that the performance 
standards would be one way to really develop competition. I think that's a 
sound way, providing that the standards are well designed and implemented. 

I was also glad to hear John say that there is a dialogue that is 
taking place. It will have to become more so as the program becomes more 

Now, let me personalize this a little bit from the human equation. 

These performance standards don't mean anything unless you make your 
colleagues and employees aware of them. It takes a good communication 
process at home to make sure they understand what you have to do and what 
the climate is. 

There can be inconsistent reporting. Now, true, we are making progress 
to reduce that but, for that very reason, I think that we must look to compete 
with ourselves. 

What do I mean by that? In my operation I have said to our folks, 
"Don't worry too much about comparing yourselves with the others, accord- 
ing to these reports. There are differences in there and you may be comparing 
apples with oranges." 

So, I think one of the best things to do is to have these standards 

lead to a critical self evaluation of our own operations. Let's look at 

our current operations versus historical and versus what is anticipated 
in the future. I think those are important. 


And, finally, I'd like to say this: even though we are making this 
progress toward performance standards, I still think we'll have a fundamental 
problem always existing. I think that you will always be debating how you 
strike a balance between administrative costs and program costs. 

1 know we have statistical standards where you can measure, quanti- 
fy, and so forth. However, now we're moving into areas that you can't 
quantify very well -- like utilization safeguards, coverage safeguards, 
reimbursement methodology, professional relations, and beneficiary services. 

What is the optimum level of service that you are going to offer? 
How do you balance, especially when you're thinking of competition, between 
administrative costs and total program costs? 

This takes judgment, and I'd like to make this analogy -- I'll defer 
to Dr. Schneider on this: I think the medical profession has lost something, 
maybe too much reliance on advanced medical technology, numerous tests and so 
forth, foresaking judgment and the laying on of hands. I say to all of you, 
and to HCFA, let's not lose sight of our main mission; let's not become bogged 
down in the compliance with performance standards, per se, to the disadvantage 
or to the detriment of service to the beneficiaries and providers. 

In the last analysis, regardless of performance standards, I have the 
conviction that we must ultimately rely on good, sound, downright management 
to achieve cost effectiveness and to provide good service to our beneficiaries 
and subscribers. 

MR. NICHOLSON: I'd like to cover two areas. I'd like to describe 
in some detail the validation activity that we're involved in, which is 
reflected in the program validation annual audit plan, but before I do 
that, wear the Marty Kappert cap and give you an overview of what the Bureau 
of Quality Control is all about. 

The Bureau of Quality Control is new within the HCFA configuration, 
having been created with the most recent reorganization that we went through 
last spring, and I'm afraid, not terribly well understood; so if you will bear 
with me for a minute or two, I'll give you a brief overview of what the Bureau 
is and what it is intended to accomplish. 

We are organized into four major boxes, and two of those boxes are 
represented here this morning by myself, responsible for the Office of 
Program Validation, and John Berry, responsible for the Office of Quality 
Control Programs. There are two other boxes called the Office of Systems 
Analysis and the Office of Financial Analysis. 

The Office of Financial Analysis has two primary responsibilities, 
one being on the receiving end of external audit reports (HEW and GAO audit 
reports, primarily), and represent HCFA in assuring that there is a timely and 
proper response to external audit findings and recommendations. That's not to 
say that we, in the Bureau of Quality Control, are responsible for responding 
to all of those audits, but we do respond to the extent that it is an area 
that we're responsible for and we do coordinate HCFA's responses. 


The Office of Financial Analysis is also responsible for doing analysis 
of statistical information to plot trends in program payments, and to raise 
questions as to why those trends are looking the way they are. Much of what 
Mr. Schaeffer indicated yesterday when he was talking about the necessity 
to build better, more accurate and more complete data bases is necessary in 
order for the Office of Financial Analysis to function in the way that is 
really intended within HCFA. 

The Office of Systems Analysis has varied responsibilities. One of 
the things that they do that is of particular interest, as far as my operation 
is concerned within the Bureau, is use software programs and computer capabil- 
ities to array and rearrange data in a way so that lead information specific 
to problems in particular program areas or problems with regard to particular 
providers can be identified; so that information can be conveyed to the 
intermediary of the State Medicaid agency; so that we, ourselves, within the 
Bureau of Quality Control, might initiate some specialized audit activity. 

Two of the four offices in the Bureau are Systems Analysis and Financial 
Analysis. Of course, John and I will talk about program validation and QC 
programs which are the two remaining offices and the ones we have specific 
responsibility for. A major function of the Office of Program Validation is 
the conduct of validation reviews both by central office staff and staff we 
relate to in the regions. The function is relatively new. We conceptualized 
what we thought program validation should become, for the most part in 1978. 
Last year, 1979, we spent a lot of time doing validation reviews. Although we 
did have instructions and were communicating back and forth between the 
central office and the regional offices in terms of what we wanted to do and 
how we wanted to do it, we were operating in a test mode. 

We decided that it was important for us in HCFA to try to figure out 
ways to become a little more proactive than perhaps we had been before, 
in terms of identifying and dealing with situations of fraud, abuse, and 
waste in Medicare and Medicaid programs. We also thought it was neces- 
sary to perhaps do more than had been done in the past to try to forge 
together some of the systems that were in place between Medicare and Medicaid 
to identify fraud, and control abuse and waste. 

It was to meet these objectives that we developed the validation review 
approach. The process breaks into three major component parts. One is 
related to institutional providers, which we call aberrant cost studies. What 
it consists of is simply taking information, statistical or other information 
which indicates that there is a potential problem with regard to a home health 
agency, a nursing home or a hospital, and then doing an investigative type 
audit to learn whether or not those statistics are truly indicative of a 

Actually, in doing those reviews, a two pronged approach is involved, 
one prong being to look at costs and whether or not costs as reported and 
used as a basis for program reimbursement are accurately reported, or whether 
or not there might be some abuse associated with the way those costs are 
reported. The other prong would be to look at medical issues, try to examine 
the medical necessity overutilization possibilities with regard to individual 


The second form of program validation review we call systematic abuse 
reviews, very similar in many respects to the institutional type review that I 
just described, except that it relates to noninstitut lonal , ambulatory care 

Here the approach is one of taking a grouping, if you will, of somewhere 
in the neighborhood of 10 to 20 of a particular provider type in a particular 
geographical area, DME suppliers, ambulance companies, psychiatrists, 
podiatrists, etc., and examining again through a designed review protocol what 
those individual providers are doing in billing Medicare and Medicaid, to 
verify that these dollars are being paid appropriately. 

The third aspect of program validation we call program implementa- 
tion reviews, an area that we're particularly excited about. With program 
implementation reviews, we are not really looking so much at individual 
providers; rather, we are looking at program areas: is it right the way that 
we have reimbursed hospital based physicians over the years under Medicare or 
Medicaid? Let's go out and do a survey in X number of facilities to take a 
look at this specific area of program reimbursement. This is just one example 
of a subject area that could constitute a program implementation review. We 
pick out an area where we think there is a potential for some vulnerability, 
either on the part of Medicare, Medicaid or both, and examine that area in 
some pretty tight detail so that we can come up with policy recommendations, 
or recommendations otherwise, to assure more appropriate expenditure of 
program dollars. It may be necessary, on the basis of the results of that 
review, to come in with a recommendation for legislative change, for new 
regulations, for guidelines, whatever. 

So, those are the three aspects of program validation and, just to 
summarize briefly, the three review areas are aberrant cost studies (insti- 
tutional providers), systematic abuse reviews (noninstitutional providers) and 
program implementation reviews to look at particular areas of program reim- 
bursement to discover what impact it is having on the program. 

So far, through December 1979, we conducted 80 reviews of the various 
types. We haven't gotten all of these 80 reports in final, but we do have all 
of those reviews at least in draft form, and we have several of them in final 
report form. As a result of those reviews, we have identified $43-45 million 
of either overpayments or potential savings to Medicare/Medicaid as a result 
of the recommendations that we came up with. 

Last fall we called in each of our regional offices and spent half day 
sessions discussing what we thought our fiscal 1980 activity ought to be in 
the area of program validation. As a result of those discussions, we produced 
a draft audit plan which was circulated in October. On the basis of feedback 
comments, we put that plan in final in February. We will be sending out the 
audit plan via an intermediary letter, hopefully within the next few weeks. 

A couple of things that we're concerned about with regard to our own 
activity in the validation area, and something I think bears a relation- 
ship to the contractors with regard to activities that they have in a similar 
vein, is focused audit. I believe it is critical m the course of doing 
claims review and audit to gear that activity toward those providers which 
potentially represent the greatest problem. I know that this initiative on 


the part of some of our regional administrators is to work with intermedi- 
aries, to work with State Medicaid agencies, so that, particularly in the 
audit area, more time, more attention, can be paid to those providers that, 
historically, have represented the greatest problem. 

Another area that we're concerned about is medical review and peer 
review. Much of what we get involved in doing these validation reviews, and 
I'm sure that you get involved in where you have providers that represent a 
problem for you, are problems of unnecessary services, overutilization. There 
must be a good capacity through Medicaid expertise to adjudicate these issues. 

I would like to ask you all to be on the lookout for that validation 
audit plan when it comes out; we would like to solicit you, as partners 
along with the State Medicaid agencies, in carrying out the design of the 
validation review activity. We believe that it's a pretty good tool for 
giving us an opportunity not only to discover problems with regard to an 
individual provider, but perhaps even more importantly, to discover and 
document problems associated with specific areas of program reimbursement, so 
that the necessary steps toward resolving these problems can be carried 
out . 

MR. BERRY: Following on the theme we talked about yesterday, a limit on 
the amount of program dollars that are going to be available to spend for our 
beneficiaries, I think one of the prime functions of the Office of Quality 
Control Programs is to conserve these funds by assuring that they are spent 

In terms of the programs that we operate, we define "correctly" as 
to an eligible beneficiary for a covered service within allowable cost or 
fee schedules, and not a duplicate of a claim that has already been paid. 

To carry out this mission, we operate or design uniform national quality 
control programs that examine specific aspects of payment or service, with the 
objective in mind of sitting outside the normal policy and operational process 
and, from being outside that process, be able to provide an objective opinion 
about how the process is operating. 

Programmatically , within Medicaid, we operate a quality control program 
that looks at eligibility, that looks at the claims payment process, and that 
determines whether States recover from third parties before they spend 
Medicaid funds. 

We also operate a utilization control program that looks at the way 
States operate utilization control within long term care facilities. And 
we operate a program called Early and Periodic Screening, Diagnosis and 
Treatment Quality Control that assures that children in public assistance 
families receive required screening and medical treatment. 

Within Medicare, we currently operate two quality control programs: 
the cost report settlement process that examines the intermediary opera- 
tion, called CREP, and the claims payment process review of carriers, called 
Part B end of line. 


The outcomes of these reviews in both Medicaid and Medicare are our 
choice -- a point that I would like to stress; quality control produces 
data, and what we do with that data is up to us. We think the data should be 
a catalyst for program improvement, and we think there are at least three 
areas of program improvement that we can concentrate on with this data that we 
produce out of quality control. 

The first is within HCFA. Are the HCFA policies and regulations clear, 
unambiguous? Do we set out a clear standard of performance for people to 

Secondly, do we provide enough money to properly audit providers? I 
know that has been a question or issue, and I think that is something that the 
Cost Report Evaluation Program will begin to delve into. 

And, thirdly, you get into the operational details themselves. Are 
the contractors properly carrying out the program the way it is written? 

All three of these aspects are examined by the uniform national quality 
control programs that we operate. 

We think that the bottom line of a quality control program has got 
to be program improvement. That's where quality control has to show up. 
It's an expensive operation, it's expensive in terms of direct labor costs, 
it's expensive in terms of the management time that is required to look at the 
issues that quality control brings up. We think that we are measured, then, 
by the program improvements that we can cause to happen with the data that we 

The systems we operate aren't perfect. We spend a lot of time on 
self evaluation and improvement. One of the problems that I'm sure you 
are aware of, and we are certainly aware of, is national uniformity: are 
we running these programs the same across the country, so when we sit down and 
compare intermediaries or compare carriers, one to another, are we comparing 
them on the same basis? 

The resolution of disagreements; do we have a fair way to listen to 
the opinion of the people that we've evaluated and make sure that opinion 
is considered when we develop our data and reports? 

The size of the samples have been an issue, particularly in Part B 
end of line, and we have the same issues with the States on that side of 
the house. Are we sampling too big, spending too much labor on the sample 
size? Is the sample size too small so that we can't produce a valid estimate 
of error across the country? 

And, lastly, the subjectivity of the cost report evaluation process. 
Can you ever run a process like this that does provide a uniform national 
comparison of intermediaries, or is the nature of the process always going to 
be too subjective for this to be carried out? 

We see our relationship with operations something like this. Quality 
control programs produce data. We, in the Office of Quality Control Programs, 
participate in the analysis of this data, looking for what problem situations 


may be there, what the causes of these problem situations could be, and the 
data that flows from us to you and to the Bureau of Program Operations and the 
Bureau of Program Policy within HCFA — it's up to you and it's up to the 
operational side of HCFA to plan whatever corrective action program improve- 
ments may be appropriate. Then Quality Control steps back in the loop again 
with another measurement period to look at the effectiveness of these correc- 
tive actions. 

The future directions -- three or four points I'd like to emphasize 
where we see these quality control programs going. 

First, one of our strengths is also a weakness. We run a uniform 
national program across the board in both Medicaid and Medicare, but the 
uniform national program doesn't give us the ability to target well enough 
sometimes. We want to look at pulling back a little bit on the uniform 
national review, reducing the sample sizes on a national basis, and try to 
concentrate on specific program areas or specific contractors where the data 
indicates there is a bigger problem than in other areas. That's one direction 
we are going to try and bend these programs in. 

The second thing we're going to try and do is widen the family of 
providers we look at in the cost report evaluation program. In FY 1981 
we are going to have a cost report review for HHAs, and we're going to 
extend the CREP program in Medicaid. 

We're also going to try and move the CREP program up on a more real 
time basis and determine if we can look at the interim rate setting process 
through CREP. I don't know whether that is possible or not, but it is some- 
thing we are going to consider. We are also going to try and provide a better 
analytical software package on the B side of the house to make the Part B end 
of line data more readable for a manager, and shorten the length of the 
printouts that we produce. 

Another objective we are pressing for is to keep the learning up between 
Medicaid and Medicare. Along those lines, we've changed the error rate 
definition m the Medicaid claims processing review to conform to the defini- 
tion we used in Medicare. Medicare has had a lot more experience in these 
quality control programs than we had on the Medicaid side of the house, and 
we have been able to use that experience quite successfully to redesign and 
improve some of our Medicaid QC programs. 

Similarly, as I mentioned, we want to extend the cost report evalua- 
tion process into Medicaid. This has never happened in the Medicaid programs, 
where there has been a controlled, comprehensive. Federal review of the way 
that the States carry out their responsibilities in settling provider cost 

Last, and maybe my personal favorite, we want to improve the analytical 
capability in the Bureau of Quality Control where we don't produce just data 
dumps, we produce information that helps to focus where the problems in 
program management may be. By focusing on those problems, maybe we can come 
up with some solutions that can be applied on the operational side of the 
house . 


We've taken two efforts this year to go in that direction. We ran 
the CREP program out last year, in FY 1979, but we don't plan now to publish 
the results of that review because the review wasn't complete. I think it 
would be misleading to publish statistics that compared intermediaries on the 
basis of less than complete results. But we did have enough data to go out to 
our regional offices with the ten worst performing intermediaries on the basis 
of last year's CREP. We've asked the regional administrators to come back to 
us and suggest what we could do with this data m hand now, how we can use the 
data from the 1979 review to better focus the 1980 and 1981 reviews, and to 
come up with program improvements or corrective action on the part A side. 

Similarly, m Part B, the quarterly report that just went to the printer 
focuses Part B, for the first time, on the ten best and ten worst performing 
carriers. One interesting piece of analysis that came out of that is, on the 
basis of the data that we've got in hand, the ten best performing carriers in 
terms of error rate have been the best performing carriers for some time, and 
they are getting better; the ten worst performing carriers have been the worst 
performing carriers for some time and they are getting worse. Their error 
rates are increasing. 

Now, that's an interesting piece of analysis that leads to further 
analysis. We are asking our regional administrators to look into that 
and comment. Is this a fair evaluation? If it is a fair evaluation, what can 
we do to exchange practices between the best and the worst where maybe we can 
bring them up? 

In all the reports that we publish from the Bureau in the future, we 
do want to stress the analytical usefulness, the strength of this data, 
for planning program improvement. 

In summary, we produce data that has integrity and is reliable. We're 
going to press to see this data used for program improvement, not just end up 
on a bookshelf some place. We want to listen to you about how we can improve 
this measurement process, make it as useful to you as it possibly can be, and 
how we can improve this analytical effort that we are just now beginning. So, 
our ears are open and we are glad to listen to comments now, or at any time, 
about these uniform national quality control programs that we operate. 

MR. WHITE: On CREP, you said you welcome comments; I have some. 

First, I have a feeling that my own audit people may be taking some 
steps in the future that, in their own good judgment as auditors, they 
wouldn't take except for the fact they feel if they take those extra steps, 
which cost money, they might make a better score on CREP. 

And, secondly, in the questions that are raised during that CREP review, 
in looking through the questions, to me, obviously some are a lot more im- 
portant than others. Yet there is no weighting on the questions as to mone- 
tary value of whether you did this or did that. It seems to me, as you go 
down the road, perhaps there ought to be some kind of weighting in scoring 
points on that questionnaire. 

MR. BERRY: I think that's a good point and something that has concerned 
us, and that we are taking a look at. We plan on contracting this year with 


the American Institute of Certified Public Accountants to take a look at the 
CREP program and give us their opinion as to how it could be improved. I'm 
sure that weighting issue will be one thing that comes back. 

We'd be willing to share that review when it is complete, because we 
want to be very open and above board as to how these programs are oper- 
ated. We thought that would be a good objective source to go to for that 
kind of information. 

As far as causing a contractor to do something for the sole purpose 
of scoring well on CREP, but that is something that would not be a good 
business practice to do, from your viewpoint or our viewpoint, I don't 
think that should occur. And if that is occurring, we sure would like to 
know about it because we'd like to change those questions. 

MR. WHITE: I think we'll all have to watch that, because I think 
that is a danger that the people looking forward to the next review are 
going to say, "Well, I really don't need to take this step in the audit 
procedure, but I'd better do it to protect myself m order to get a good 
score." And that costs money. 

MR. RINEHIMER: Don, on your system abuse or fraud review of the aberrant 
practices, and so forth; in your design and implementation of these validation 
programs, did you seek much input from the intermediaries or carriers? It 
seems to me what you have described many of the intermediaries and earners 
had already been doing, either in their private business, for government, or 
for both, and I wonder whether there was some duplication of effort. 

MR. NICHOLSON: Yes. I think those parts of the validation process, 
in at least some measure, are a duplication of what carrier and intermed- 
iary responsibilities truly are, and I think at some point -- and I'm not 
exactly sure when the point comes -- we'll probably want to back out of 
that activity altogether. 

It was felt, at least in part, because we are trying to build something 
uniform or at least in some measure more consistent between Medicare and 
Medicaid, that we ought to throw ourselves into the fray a little bit. We'll 
be selective — we're not talking about a large number of providers out of the 
total universe. And certainly in no way should anything that we are doing 
under the rubric of program validation displace or replace any of the inter- 
mediary or carrier activities or State Medicaid activities that are an ongoing 
part of the process right now. 

We had some informal discussions. I'll have to say that we never 
presented validation as a concept or any of the language behind valida- 
tion formally to the CRG groups or the FIG groups or the other advisory 
groups. However, as we are getting involved now — and, as I indicated, 
now that we are sending it out with an intermediary letter -- we welcome 
any reaction that any of you have in terms of what we have structured as 
a plan, so that we can modify or change it as the need arises. 

MR. RINEHIMER: On these quality review programs, some of the States 
that administer Medicaid programs have some wonderful reputations for quality 
and if they don't perform, are you going to hold their money back? 


MR. NICHOLSON: The issue of sanctions or disallowances on Medicaid 
quality control was an issue that was taken out of our hands by the Congress 
with the so called Michel Amendment, that does set a performance standard for 
State agencies to follow and does legislate that we disallow Federal matching 
funds over the standard. 

I think there is a message in that for us, that the Congress was quite 
upset with the management of the Medicaid program and has dictated to us, both 
in utilization control -- which is an extremely rigid fiscal sanction, and in 
Medicaid quality control -- which has a little more leeway in its sanctions, 
that they are serious about getting control on misspent money, and have really 
taken away a lot of our flexibility on how we would use quality control 

DR. SCHNEIDER: Our theme is measurement standards of performance 
under contracts, and certainly it is focusing our attention on what consti- 
tutes the contractual obligation. I am reminded of a cartoon I saw. The 
setting was a suburban kitchen, and there was a gentleman in coveralls, down 
on his hands and knees, and on his back was "Ajax Pest Control Service." He 
had all the little tools of his trade, the cannister and the little hose, and 
he was down on his hands and knees, but the focus of his attention -- in front 
of him, on the floor, were these lines and lines of little creepy-crawlers, 
little insects. They were arranged very neatly in files and in platoons. The 
little end bugs carried a pennant and there was a color guard. 

And in the background was a very harried looking housewife. The caption 
was, "Ma'am, you should have read your contract. It said we'd control them; 
it sure didn't say anything about killing them." 

I'd like to briefly talk about the general direction the PSRO program is 
taking, give you an implementation update, and then get into some of the areas 
that will be of primary interest to you. 

As to implementation, this fiscal year PSROs plan to review 11.1 million 
Federal admissions. This is 70 percent of the total of about 15.8 million 
that would be potentially subject to PSRO review. Sixty-seven percent of the 
reviews will be Medicare reviews, so that now PSRO review covers A, 699 hos- 
pitals out of the 5,525 that are located in conditional PSRO areas; 73 percent 
of our nation's 6,500 hospitals are now under PSRO review. 

As you know, most of the Federal programs have been hard hit by budget 
cuts, and the PSRO program certainly has been among them. So many of the 
major initiatives that the PSRO program is undergoing relate to a much more 
determined effort to manage the program to get the job done the best way with 
the limited funds that are available. 

A number of the initiatives began during the past twelve months, and 
there are a number that are now m place. We can begin to see some of 
the results. Let me enumerate. First of all, focused review, which means 
placing more emphasis upon particular diagnoses, procedures, hospitals, and 
physicians where the PSROs identify problems. Most of the PSROs are into 


intense review of less than 50 percent of their cases, and m the belief that 
since data systems are now in place, it is no longer cost effective for PSROs 
to look at a hundred percent of the admissions. 

Another initiative would be the provision of incentives, rewarding 
PSROs that have demonstrated an ability to perform well by supplementing 
their budgets with additional funds to conduct special initiatives in such 
areas as ancillary services review. PSROs that have performed poorly do face 
the loss of Federal funds if their problems aren't corrected and, in fact, to 
date, we have discontinued support of six PSROs. This extreme action of 
defunding sometimes is necessary and it has to be taken in some cases, but our 
goal is improvement rather than punishment. 

Now that the PSROs recognize that nonrenewal of their grants is a 
very serious possibility, we're finding that those PSROs that get into 
trouble are much more willing to work with us to resolve their problems. 

A third initiative is in the area of PSRO objective setting. If we 
are going to assess the quality of PSRO performance and insure cost effective- 
ness, we need performance indicators to measure PSRO performance. Merely 
going through the process of review, as we emphasized in the beginning of the 
program, is no longer good enough. Each PSRO now is required to work with 
its regional office and to negotiate realistic, quantifiable objectives that 
are based upon the particular nature of the utilization and the quality 
problems in the PSRO area. 

The objectives that are set by the PSROs have ranged from reduction 

in long preoperative stays, for some specific procedures, to improvement 

in the inappropriate use of emergency rooms and increase in the use of 
outpatient settings for surgery. 

Along with this local objective setting process, we'll soon be asking 
PSROs to begin meeting national goals. PSROs are going to be expected to 
focus upon perceived national problems and, where they exist locally, to 
incorporate them in their local objectives. 

Now, a fourth major initiative the program has taken in terms of cost 
reduction is budget control. When the PSRO review budgets were reduced, we 
had to provide special assistance in financial management, and we developed 
models that showed how review costs might be structured to achieve necessary 
reductions. Also, regulations were developed and are now being finalized, 
which allow PSROs to control the costs not only of their nondelegated review, 
but also of delegated review in hospitals. 

By the end of 1979, the cost of review averaged $8.70 as opposed to 
the average cost back in 1977 of $13.00 per review. 

Now, the reduced program budget really hasn't changed the review respons- 
ibilities that the law requires of PSROs, but it has made us take a hard look 
at how we can most effectively accomplish that review which still remains to 
be implemented, and we think that the best way to do this is by building upon 
and strengthening the existing systems that we have, not by duplicating or 


So, since the PSRO program and the Medicare program are now both under 
HCFA, Leonard Schaeffer and Dr. Helen Smits, our Bureau director, and the 
other top administrators in HCFA are now and will continue to be working 
together to achieve HCFA goals by developing integrated and effective poli- 
cies. I think this relationship is long overdue betweeen our two programs, 
because there is no question we've had a history of competing and even not too 
thinly veiled adversary relationships between the PSROs and fiscal agents. 1 
think we've got to put away the weapons; and we are expecting them to sit down 
and to join in a cooperative effort to develop a vigorous and effective 
medical review system. 

I know, in many instances, fiscal agents and PSROs do have very good 
relationships, but this has to become the rule. This leads me, then, to 
discuss the expanded future relationships that HCFA has begun to empha- 
size between the PSROs and the fiscal agents. 

The specific review activities that PSROs are beginning to carry out, as 
required under the law, are physician services review and ancillary services 
review in the hospital setting. Again, rather than having the PSROs reinvent 
the wheel, we'd like to see the PSROs and the fiscal agents develop solid 
working relationships and use one another's expertise. Limited budgets and 
efficiency awareness simply doesn't allow us to permit duplication. 

We feel that the fiscal agents have sound data and analytic skills 
that should be built upon and utilized to the maximum. PSROs are avail- 
able to provide their medical expertise to the fiscal agent, to develop 
or modify screens and adjudicate difficult problem claims. 

So, where are we now in physicians' review and in ancillary services 
review? First, physicians' services. This past June, a draft transmittal 
instructed PSROs to begin working with carriers to link Part A with Part 
B. This was the so called Type 1 of three possible types of interaction 
between PSROs and particular carriers. In other words, this would require the 
PSROs to go ahead and review their focused cases and, if necessary, deny 
physician inpatient services and notify the carriers of their denials. 
Linking Part A and B was felt to be just a logical extension of the review 
process, since it really makes little sense to deny Part A and not Part B. 

Because there obviously will be some operational problems in beginning 
this interaction, HCFA plans to convene a technical advisory group this spring 
or summer to include earners. State agencies and PSROs, to explore possible 
problems, resolve them, develop operational parameters as guidance. 

Now, the second, the Type 2, kind of interaction between PSROs and 
fiscal agents includes the carrier requesting PSRO medical necessity determi- 
nations on the difficult claims that have been identified by the prepayment 

The third type of interaction, which is carrier referral of problem 
physician profiles to the PSROs, we feel is most likely to have the greatest 
impact on strengthening the medical review system, because PSROs and carriers 
will then be able to avoid data duplication and to work with each other to 
identify those physicians whose practice patterns are questionable. PSROs 
then can go ahead and work with these physicians to help modify their 


In evaluating these three types of interactions, we have set up five 
demonstrations between carriers and PSROs around the country. For the 
most part, these demonstrations will be ready to begin making referrals 
by next month, and should last between 14 and 18 months. Their experi- 
ence should provide us with valuable guidance as to how to go from here. 

At present, we feel we are going to be emphasizing Type 1 and 3 reac- 
tions. In other words, the A-B linkage and the referral of problems and 
profiles to the PSRO. We are concerned that Type 2 interaction, ongoing PSRO 
involvement in medical necessity determinations, would be burdensome and very 
costly. I've had personal experience in this region with the kind of problem 
we got into in Part B review, when it went on-line with tremendous delays in 
claims processing, and we interfered with the really finely tuned system of 
claims review. 

So, in the meantime, until final policy and guidance is out, PSROs 
and carriers should begin thinking about and begin developing review methodol- 
ogies that will work best for their own particular systems. 

Now, on to ancillary service review. Although the policy for ancil- 
lary service review has been out to the PSROs for some time, budget restraints 
and technical difficulties have hindered most PSROs from even beginning 
ancillary services review. This is now changing as we are able to provide to 
particular PSROs financial incentives and supplements to their budgets. Some 
PSROs are even reviewing ancillary services without any special funding. 

Approximately 70 out of about 180 PSROs are now reviewing ancillar- 
les, all employing various review methodologies. Very few of these PSROs 
are performing binding review. Most are utilizing the medical care evaluation 
approach to ancillary services review and, as ancillary service review pro- 
gresses, we will be encouraging PSROs to work with fiscal intermediaries, 
especially using data screens to help identify problem ancillanes. And as 
with physician services review, you and the PSROs can considerably strengthen 
the impact of the ancillary services review. 

We also expect PSROs and fiscal intermediaries to continue to develop 
other forms of ancillary service review, such as assisting the fiscal inter- 
mediaries with ancillary determinations, and having the PSRO focus on ancil- 
laries, and making review determinations for bill denial purposes, in some 

A specific area in which PSROs and fiscal intermediaries will be asked to 
work together is on routine admission studies. The intermediary manual has 
been revised to require the FI to deny payment for diagnostic procedures not 
specifically ordered by the physician, those not necessary or duplicative of 
the same tests that were provided just prior to admission. So, policy will 
shortly be distributed asking the PSROs and the intermediaries to work to- 
gether m this regard. 

I want to call your attention to an important change that we expect 
to be made very soon with regard to physician services and ancillary review, 
and that would be the withdrawal of Section 466.10(c) of the PSRO Hospital 
Review Regulations, which were issued June 4, 1979. This section relates to 
the physician ancillary services that are incident to the hospital stay. It 


says that a PSRO certification of a patient's admission or continued stay will 
constitute approval of all health care services provided or proposed to be 
provided during the certified length of stay, unless the PSRO specifically 
reviews and disapproves a particular service. And conversely, if a PSRO 
makes an adverse determination on medical necessity of the stay, all the 
ancillary services provided during that stay would likewise be disapproved. 
That section will be withdrawn. There has been a lot of confusion as to who is 
responsible for ancillary services review and, in some cases, it has actually 
resulted in no one doing the ancillary services review. 

So, an intermediary letter and a general memorandum are going to be 
issued shortly. They are going to explain that this section of the regs 
will be withdrawn and that, in the interim, where PSROs are unable or un- 
willing to fulfill their responsibility for review of inpatient ancillary 
and/or physician services, fiscal intermediaries and carriers are going to be 
asked to go back to the existing preregulation policy, unless or until an MOU 
has been signed with the PSRO authorizing the PSRO to review these services 
and make the medical necessity determinations. 

This will be followed by a Notice of Proposed Rulemaking. It will 
contain the draft language to this section and will set out in detail the 
interaction between the State agencies, fiscal agents, and PSROs in regard to 
ancillary services approval. 

Finally, ambulatory care review. PSRO activity in ambulatory review 
is very limited at the present time. There are only six demonstrations 
performing ambulatory review. Some of these demonstrations are actually 
using a claims review process, and although no PSRO movement into this 
area is expected for quite some time, a claims screening system, working 
in conjunction with the State agency and the carrier, looks like a very 
promising alternative for a productive working relationship between the 
PSROs and fiscal agents. 

In conclusion, I would like to say that we expect fiscal agent PSRO 
cooperation and coordination to bring about a more efficient and a 
strengthened utilization review system. Health care cost containment will be 
dependent on the combined strengths and the resources of both you and the 

MR. WHITE: What I am about to say relates somewhat to the discussion 
yesterday, especially some things alluded to by Jack Buelt, representing the 
President's Management Improvement Council; and also relates to what we are 
talking about today: measuring the quality of performance. 

I feel, no matter how sophisticated the measures of performance become 
with respect to functional standards and statistical measures of cost, quality 
and service, the HCFA evaluators should be aware of an intangible factor 
present in each contractor's operation that is virtually impossible to 
measure. That is, the philosophy and attitude of management. 


The true quality of a service function, including customer or client 
relations, employee morale, innovation and cost awareness, depends more 
than most people realize, or want to admit, on the attitude of management 
up and down the line. 

Assuming that the work environment is satisfactory, that total compensa- 
tion is competitive, employee morale and performance will be directly in- 
fluenced by management. While claims and correspondence may be processed in a 
timely fashion, does the manner in which these functions are performed leave a 
bad taste in the mouths of the beneficiaries and providers? Is the ultimate 
goal only to meet performance standards, or is it to beat the standards 
through innovative techniques, but always being concerned about beneficiary 
and provider relations and total program costs? 

It is my contention that management attitudes will determine the answers 
to these questions. Somehow, the evaluators of contractual performance must 
be aware of this, and somehow — and 1 don't know how — consider this factor 
in the final analysis of performance. 

MR. RINEHIMER: Very quickly, 1 would like to make one comment on 
PSRO. We have been selected as one of the demonstration sites. Under 
this project, the PSRO will refer to us adverse institutional review determ- 
inations for possible denial of physician services that were rendered during 
the hospital stay. Dr. Schneider mentioned, maybe if Part A cuts off. Part B 
should be cut off. That's not so simple. You may not require the hospitali- 
zation, but the services of the physician could still be required outside the 
hospital. The other part of the two way street is that we will refer indi- 
vidual claims to the PSRO where physicians' services may be considered medi- 
cally unnecessary. We'll refer to the PSRO patterns of questionable practice, 
as determined by analysis of our claims data. 

What this will lead to possibly, is an involvement of the PSRO in 
the setting up of parameters and screens for our use in the adjudication 

Now let's follow this through. We have twelve PSROs in Pennsylvania. If 
this were to develop this way and their involvement became manifest, would 
they be asking us to set up all sorts of different parameters and screens m 
our computer? Then what happens to this matter of consistency? 

Now for the ramifications. You have the expense of the communications of 
the carrier to the PSRO, the PSRO to the carrier. You have the problem of 
preserving confidentiality, and then you have the decisionmaking which would 
take a coordinated effort. 

Now, this costs money, and when I think of all these things along with 
compliance standards, and then HCFA says to me, "Now, we are going to put you 
out on bid" -- I'm going to have to take all of these things into account. 
I'm wondering how I am going to do it. 

But those are the challenges that you and I face. They have to be 
met somehow, and somehow we'll meet them. In the ambulatory setting there is 
a way. We have an advisory system of 150 medical doctors, representing 50 
specialties. We use them not only for the hospital setting, but for out of 


hospital stay as well. It's effective, it works, it's simple. The turnaround 
time on their decisionmaking is around 14 days. Not bad. I think if you ever 
get into the ambulatory area, you should take a hard look at something like 
that, so I offer it to you. 

COMMENT: It would be a mistake to let this opportunity pass and not 
express the very serious concern that a number of intermediaries have with 
across the board evaluation programs. 

First of all, I think it is highly subjective in its application. 
As John mentioned, you should always be as objective as you can possibly 
be. Nevertheless, CREP is highly subjective in its application. 

There are other problems with it that need resolution. For example, 
there should be a separate CREP for no audit settlements -- and I under- 
stand that there will be, although I haven't seen it raised. There should be 
a separate CREP for limited audit settlements. I think that more emphasis 
should be placed on the quality of the desk audit and less on the audit, 
because the Medicare audit is now a full scope audit. 

In summary, I would only ask that you evaluate us on what we do in 
the audit process, and not on what we don't do. 

MR. BERRY: We spent a lot of time working on the no audit CREP, the 
limited audit CREP process and the quality of the desk audit. Let me say 
where we are now, although a decision has not been made. 

First, without a firmer standard on just what has to go on in the 
desk audit, it is pretty hard to proceed past that point, and we want to 
step back and encourage a better definition of what a desk audit should 
be, what variance analysis ought to be carried out, and what should happen as 
a result of these specific variance analyses. That leads you into the next 
step because we're now thinking that a separate kind of a CREP program for no 
audit or limited audit just doesn't fit; that we want to evaluate the way the 
cost report was settled. Part of that evaluation would be a critique of the 
kind of audit that the intermediary applied, whether they did a full scope 
audit, a limited audit or no audit at all in a particular area. 

I'm not sure just yet where that would take us, but in trying to develop 
a separate CREP program for no audit and limited audit, we just couldn't get 
any place. Whether that's us or whether that's the nature of the program, I'm 
not sure yet. I would see, right now, a single CREP program, but one step up 
in the process, a tighter definition of what a desk audit really should be. 
So part of our evaluation of an intermediary would be, as a threshold, did the 
intermediary carry out this tightly defined desk audit and what did they do 
with the information that was produced. Then you take the next step into an 
evaluation of the cost report settlement process. 

We'll be open with this. We'll share our thinking on it as we go, m 
whatever the right form is, the TAG or the other meetings, but that's our 
thinking right now. 




Lindsay Hanna 
Connecticut General Life Insurance Company 

Panel Participants: 

Don SI 00 
Mutual Hospital Insurance, Inc., Indiana 

Peter D. Mills 
Occidental Life Insurance Company of California 

Barney Sellers 
Office of Beneficiary Services, HCFA 

Mildred L. Tyssowski 
Bureau Program Operations, HCFA 

Dorothy Ryan 
National Council of Senior Citizens 

Patricia Schoeni 
Office of Public Affairs, HCFA 

MR. HANNA: I'm Lindsay Hanna, director of government programs for the 
Connecticut General Life Insurance Company. We are the Part B carrier in 

I'd like to quickly introduce the members of our panel. This is the 
order in which your panelists will make their presentations. 

Barney Sellers, the director of the Office of Beneficiary Services; 
Dorothy Ryan, president of the Ohio Council of Senior Citizens; Donald Sloo, 
vice president of government programs of Indiana Blue Cross and Blue Shield; 
Peter Mills, vice president and chief Medicare administrator, Occidental Life 
of California; Pat Schoeni, director of the Office of Public Affairs m HCFA; 
and Mildred Tyssowski, director of the Bureau of Program Operations. 

I know it IS dangerous to try and define a complicated area m a few 
words, but I would just like to set the stage for beneficiary services. 

For the purpose of our panel, we should be considering those functions 
and activities which are over and above the basic role we have of administer- 
ing Medicare benefits, functions and activities that involve contact with the 
beneficiary population, written communications, telephone, face to face 
contact . 

The beneficiary is the real client or customer of the Medicare program, 
although frequently intermediaries and carriers must deal with the beneficiary 
through the institution or the physician. 

Let me suggest that most of our functions -- claims processing, audit and 
reimbursement, etc. — are designed to meet the letter of Medicare statute and 
regulation. I suggest to you that beneficiary services are activities which 
meet the spirit of the law and the regulations. 

MR. SELLERS: I arrived at HCFA in October 1979, and our office was 
formally established by the Secretary, at Mr. Schaeffer's request, this 
past December. 

We are, in a sense, the new kids on the block, and I am at the very 
beginning of what I, would call a new education process, trying to learn as 
much as I can about the two very complicated programs. 

What I would like to try to do is spend a few moments telling you about 
the office, what it is doing now, what it intends to do, and share with you 
some personal observations that I've made as a result of being on the job for 
a few months. 

Let me, first, however, make a general comment about Medicare itself to 
set the functions of my office in some perspective. 

Although Medicare — and to some degree, Medicaid — has made a sub- 
stantial contribution to providing financial access to health services for the 
aged, the fact remains that since these progiams were created, they have had a 
limited and, in some instances, a decreasing impact economically on the lives 
of the people they were intended to serve. 


Medicare coverage of the total aged health care bill has remained rela- 
tively constant since the program was created, but this coverage accounts for 
less than half of that expense. Beneficiary out of pocket expenses are higher 
now in current dollars than before these programs were created. Access to 
services, ease of administration, and client satisfaction have been affected 
by physicians who accept assignment, and while assignment rates vary dramati- 
cally from State to State, nationally, over the years, that rate has declined. 

Finally, the net Medicare contribution to physician services, if one 
takes into account the premiums paid by beneficiaries, is about 30 percent. 

On top of this, we all continually find ourselves facing the consequences 
of widespread public misunderstanding, to some extent our own fault, that 
Medicare will pay for either all medical expenses, sometimes assumed by those 
who just enter the program, or a flat 80 percent of all charges, or for 
certain items which the law simply does not provide for. 

In the midst of this comes a new small Office of Beneficiary Services. 
Let me say, flat out, that this is not a front or a public relations gambit. 
It will not, blindly and emotionally, represent a consumer point of view 
without careful thought and analysis and facts. It will take its job quite 
seriously and approach it quite professionally. 

Our general tasks are as follows: to increase communication with bene- 
ficiaries, especially at the national level, and help them to influence what 
we do; to review and reassess our information strategy and beneficiary infor- 
mation products; to use the financing programs as a vehicle for providing 
practical, effective consumer education; to make our own managers and em- 
ployees more sensitive to the human side of our programs -- and when I say 
"our", I mean your employees as well; and, most relavant to you, to review and 
assess the way in which we administer our programs for beneficiaries, this 
being clearly the most difficult and sophisticated of the tasks. 

So far, we've started the organizational process of the office, which, in 
the Federal system, is a relatively complex thing to do. We've laid out a 
long range plan for beneficiary services, containing specific program pro- 
posals for both policy initiatives and operations for the next several years, 
and we have taken some modest first year steps in preparation for a more 
active followup period in the succeeding couple of years, including: an 
inventory of what beneficiary services activities we now have underway; a 
request that the Department's Inspector General conduct a service delivery 
assessment of all beneficiary services provided by contractors -- that is now 
underway as well; a national training program for beneficiaries on the pros 
and cons of purchasing health insurance policies which supplement Medicare, 
anticipated to start in the middle of this year, and preparation for antici- 
pated administration of new legislation in this area; preparatory steps in our 
regional offices to assign responsibilities for this area in anticipation of 
substantial and more specific responsibility later on; a survey of the way in 
which HCFA's research and demonstration budget is spent in regard to bene- 
ficiaries, and initial meetings between the Administrator and the beneficiary 


In short, the first few months have been spent modestly m an effort 
to get our own house in order and to prepare for what I anticipate will be 
much more active and productive months to come. During this period, however, 
I have traveled both within HCFA and around the country in an effort to 
understand some of what we do now. I've had the pleasure of visiting some of 
you and appreciate your diligence, professionalism and dedication, and the 
complexity of your work. 

Permit me to share some random observations on what I've experienced 
and seen thus far. 

Beneficiary services is seen, in general, as a special, white hat, 
ancillary activity, not integral to our basic mission. Our ability to 
assess both impact of our programs on the health status of the population 
we serve, and the quality of the mechanisms we use to carry out the job 
appears very limited. 

Program evaluation is virtually nonexistent, and self assessment is 
sometimes superficial. The beneficiaries' confusion about the financing 
system in general and our programs in particular is extraordinarily high, and 
there is probably no total answer to this because of its complexity. 

In some instances, we appear to succeed in educating and explaining 
complex questions and in other instances we appear to fail. The quality of 
current S5A district office Medicare services vanes considerably and, in 
some instances, is simply unknown. 

Proposed changes for contractor, HCFA, and SSA service relationships have 
the potential for reducing services to beneficiaries, as well as improving 
them, and the current nature of that relationship is, in my opinion, very 

The message that we, HCFA, have given you, the contractor, regarding 
holding down costs, while at the same time upholding high standards for 
quality service in an increasingly competitive atmosphere, has been both 
conflicting and vague. We have not yet put our money where our mouth is when 
it comes to beneficiary service. 

Quality control has been defined almost totally with regard to cost 
containment. In my judgment, in the private sector, such an approach would be 

In general, although there are striking exceptions, beneficiaries don't 
understand the forms you send them and the letters you write -- and, neither, 
frankly, do I. 

Telephone services 1 have observed, while in general still in an infant 
stage, have both positive and negative characteristics. Many telephone 
answerers handled complex calls, that I listened to, competently and pleasant- 
ly, but their services were depreciated by consumer difficulties m getting 
through in the first place, and excessive use of jargon. 

We do not have, as far as 1 can tell, an adequate system, right now, to 
currently measure the quality of that service. 


Almost everything we write and say is filled with jargon, which is simply 
not understandable and is used primarily for our own convenience. 

We have an appeals system which is structurally suspect and a reconsider- 
ation system which is not uniformly administered and appears often too impos- 
ing or untrustworthy to the beneficiary, rightly or wrongly. Most benefici- 
aries who have doubts about the adequacy of claims paid assume that you keep 
the money that is not paid out. 

There are points in the claims payment system requiring judgment; for 
example, the application of screens. And there is some concern about the 
quality of service and the judgment that is used at these points. My personal 
impression is that frequently both the complexity of these programs and the 
manner in which they are administered does not leave you with a public rela- 
tions plus for potential private business. 

Contractors have not assumed the public service role, or do so reluc- 
tantly. That is, there appears to be a great resistance to provide service on 
those variety of inquiries that are not directly related to the payment of 
claims that you handle. We have failed, to date, as Federal administrators, 
to clarify and rationalize an effective national system of beneficiary serv- 
ice, which incorporates a field office component, a contractor component, and 
a national office component. 

There do not seem to be major problems on turnaround time for claims 
processing and, in some cases, this handling, to me, was very impressive. 

Special beneficiary projects, administered at the site of service -- that 
is at the site of health service — with common sense as well as sensitivity, 
appear to serve hospitals and carriers, as well as elderly people, reducing 
costs as well as confusion. 

Finally, the multi-layered complexity of our system removes most of the 
actors from the people who are supposed to be served. In a highly competitive 
private sector business, this would probably lead to considerable consumer 
dissatisfaction and loss of market penetration. You and we are saved from 
some of that consequence, if not all of it, because we have a monopoly. 

What can and should we do? I can only share with you some initial 

We should develop a better Federal capacity to measure program impact on 
health status and on access to services; expand our definition of quality 
control to include oversight of denied services as well as true quality; 
improve our own capacity to judge the effect of our actions on beneficiaries 
and be prepared to pay a price for doing so. 

The conflict between cost saving and quality service must be surfaced and 
resolved wherever it is necessary to do so. Correspondence must be improved. 
The EOMB must be redesigned. Money for special beneficiary service must be 
set aside, and more careful studies of the quality of the basic claims de- 
cisions made. 


We must have a quality field presence in one form or another. People 
must have other people available to them, face to face, to deal with as long 
as they are part of the reimbursement system. 

The impact of proposed policy and operational changes on beneficiaries 
must be made explicit and public before they are made. 

We must move away from standards which are process oriented and aimed at 
internal mechanics and administrative forms and toward outcome and quality 
standards as well. 

We should have a way of rewarding quality service by the contractors, as 
well as low cost operations. 

Our information materials must be made part of the larger public informa- 
tion strategy which takes into account the age, education, health status and 
interest of the people we are seeking to reach. 

Some of these thoughts are neither new nor earthshaking . Some may 
require major change. Which should be proposed or accepted now? I simply 
don't know. But it appears to me that, over time, we will all pay an increas- 
ingly heavy price if we fail to face and resolve some questions which have 
plagued the program for years. 

I hope, with the creation of our new office, and working closely with the 
other bureaus of HCFA, that we will demonstrate a new institutional capacity 
to do that and, with your cooperation, we'll succeed. 

Some of the standards we must use to judge the accuracy of our efforts 
are sometimes more diffuse and more difficult to define if the suggestions I 
make are followed through on. But that should not mean a lack of commitment 
to reach them. 

Our job is to make big government into small government for our elderly; 
a government which is human and humane, which listens, reaches out and re- 
sponds. When we do that, we will be doing our jobs well. 

The people we serve have a right to expect nothing less from us and we 
have an obligation to keep trying until we succeed. We must build a system 
which incorporates those kinds of qualitative considerations into the 
standards we use to judge performance by ourselves as well as by you. 

And it is not an easy task. 


MR. HANNA: I want to take a couple of moments to describe Dorothy Ryan 
for you, because it is a real pleasure to have Dorothy here. She is the 
president of the Ohio Council of Senior Citizens. She serves on the Board of 
Directors of the National Council of Senior Citizens. I've spent a number of 
pleasant moments with Dorothy, here, and know that she is working literally 
full time in the best interests, as an unpaid volunteer, for our senior 

We have with us truly the voice of the client. 

DOROTHY RYAN: As a Board member of the National Council of Senior 
Citizens, I would like to present some of their concerns about our Medicare 
beneficiaries receiving the necessary information and assistance to enable 
them to fully utilize the Medicare program. 

This is very important to the National Council of Senior Citizens because 
they feel a responsibility to their well over three million members in the 
3,884 clubs affiliated with the National Council throughout the nation. 

As President of the Ohio State Council of Senior Citizens and its 120 
affiliated groups representing some 300,000 senior citizens, and as President 
of the Northeastern Ohio Senior Citizens Council, representing about 20,000 
senior citizens in a four county area, I, too, am interested in how problems 
can be corrected or eliminated so I may be of assistance to the members of 
these two organizations. 

We realize that Medicare was not a full answer to the health care crisis 
of the elderly when it was enacted in the 1960 's. But it has been a success- 
ful partial answer -- if we can make it possible for Medicare beneficiaries to 
make full use of the benefits available to them. 

Medicare has exposed the flaws in our present health care delivery 
systems, the ineffective cost controls, uneven quality of care, and the 
neglect of the patient using Medicare. 

Realizing all of these factors, we must make every effort to enable our 
Medicare beneficiaries to implement this program by making them aware of 
what it does, and what it does not do for them. 

I have found that the persons calling me for assistance with their 
Medicare problems are not very knowledgeable about the Medicare regulations. 
They have probably received a Medicare booklet at the time they became elig- 
ible for the program, and more than likely, never really read it. At that 
time, they were not particularly interested in their rights and privileges 
because they had not yet experienced a health care problem. 

Some have occasionally heard, or possibly seen, programs covering 
Medicare regulations, but these programs are usually unscheduled and very 
brief so no real impression has been made on the individual. 

When they become a patient, or their family becomes involved with a 
health care problem, they become uneasy, confused and in some cases even 
fearful of consulting a physician because of the possibility that this 
health care problem is going to result in extremely high health care costs. 

I receive many questions concerning the 80?o of "the reasonable cost" used 
as a basis for payment of their claims. They cannot understand why, when 
their doctor has charged them a certain amount, the Medicare reimbursement 
does not cover 80?o of his/her actual charge. They have asked who sets 
the "reasonable charge" and what arbitrary guidelines are used in decid- 
ing which charge is "reasonable" in a given area. Frankly, I, too, would 
like to explore this further. 

One of our people asked his doctor why his fee increased every time a new 
"reasonable charge" was set for our area. The physician replied that they do 
this so they will already be eligible for a higher scale the next time the 
"reasonable charge" is reviewed. 

From personal experience, I can sympathize with the person losing their 
spouse and trying to cope with resulting Medicare problems. They now discover 
that the death of their mate results in a different approach in securing 
Medicare reimbursements. They find they have two choices -- and not really 
two choices since one is almost impossible to secure. They must either pay 
the deceased's bills in full and then return the paid receipts and necessary 
forms to the carrier, or they can try to have their doctor accept assignment. 
We rarely find a physician willing to do this as they do not wish to accept 
anything less than the full charge they have made for their services. 

Even though I felt I was reasonably knowledgeable about Medicare pro- 
cedures, I had not been aware of this particular regulation until I was 
forced to face it at the death of my late husband. 

One of our Regional Council members told us that his deceased wife's 
medical bills were so extensive that he had to borrow money to comply with 
this regulation before he could get the Medicare reimbursement. Something 
needs to be done to change this regulation of the program. 

I really became aware of the lack of available information concerning the 
Medicare program about two or three weeks ago. I had been requested to speak 
at the Youngstown State University. The class involved had expressed an 
interest in knowing something about the Medicare program. I felt that if 1 
took some Medicare booklets with me, these students could later use the 
booklet for referral when they found they could not remember something I might 
have presented to them in class. 

1 was surprised to discover that there was some question as to whether 
the twenty-five booklets I needed would be available at the local Social 
Security offices. Although they were able to find the necessary books 
for me, they could offer no assurance that they could later furnish the 
75 copies I requested for the March meeting of our Regional Council. When I 
suggested that I would write the national Social Security Administration 
offices, 1 was advised I would have a better opportunity of getting the 
necessary copies if I waited until they contacted the area offices in our 
regional district, to see if they could pick up the 75 1 needed. 

They also explained that the short supply exists because many insurance 
companies request quantities of these handbooks for distribution to their 
clients and customers. This practice should be discontinued if it means our 
beneficiaries are not going to find copies available when they need them. 


Although the booklets I did get were a recent issue, they still were not 
up to date as far as the deductibles were concerned. This means that any 
recipient of one of the booklets is going to become angry and confused when 
he/she makes a claim and finds he/she has not yet met the present deductible. 

Perhaps it might be well to mail directly to each beneficiary, a copy of 
the latest Medicare handbook. When changes are made, a special leaflet 
should also be sent to the individual Medicare beneficiary. These could 
be placed in their own handbook for reference. Some of our larger minority 
groups would benefit by having a handbook printed in their own language which 
would make it more easy for them to understand the regulations. 

The National Council of Senior Citizens has embarked upon a program 
rendering assistance to Medicare beneficiaries to take care of the problems 
they may have under the Medicare program. They have done this in cooperation 
with the Medicare Bureau. It started with inpatients at the hospitals who, 
because they were ill, may be in greater need of such assistance than any 
other group of beneficiaries. Special Medicare beneficiary aides were in- 
structed in skills, knowledge and capabilities enabling them to carry out this 

However, it was discovered that the problem was not really too great for 
patients already in the hospital. Most hospitals have a Medicare department 
with personnel fully cognizant of all the regulations and the patient usually 
has very little to do except sign the Medicare form. Some hospitals have 
social service departments which perform this service and they resented 
having the Medicare beneficiary aide approach the patient in the hospital. 

The very real need was found to be assistance for the persons trying to 
cope with Part B of the Medicare program. 

Many of them do not know who the insurance carrier is, and many of these 
carriers do not have an office in the community. They discover their doctor 
does not accept assignment, so they are left to handle the Medicare form 

Some physicians charge from $1.00 to $5.00 to complete insurance forms 
including the Medicare form. If a claim is denied because the doctor has 
not provided sufficient information to explain his charges, the physician 
resents having to fill out another form. 

We have found our people paying their doctors before they ask them to 
complete the Medicare form. In many instances it then takes longer to receive 
the completed form from the doctor's office. They have already received their 
money and are in no particular hurry to get the form completed. I would have 
to agree, though, that this might usually be the fault of the office manager 
or secretary who is negligent in completing the form and getting the doctor to 
sign it so it can be mailed to the patient or the Medicare carrier's office. 

Many beneficiaries are confused and exasperated when they have a Medicare 
form returned for additional information. If they have other insurance 
coverage, they are inclined to accept what they have received from Medicare 
and hope that their other insurance will cover any additional difference. 


Few, if any, are aware of the procedure to follow in requesting a review 
or special hearing of their claim, even though they feel they are entitled to 
more reimbursement. They are not aware that their Social Security office 
could do this for them. 

Because it is a government form which many do not understand, some less 
informed individuals and many with minimal education, fear signing the 
Medicare form. Some of our elderly fear any government forms because they 
are afraid they will lose their home by signing them. 

Our Medicare carriers are often more concerned with cost savings to them 
rather than with beneficiary services. They report that it takes longer to 
serve the Medicare beneficiary than it does to take care of their private 

Although at one time the people in our area had a problem with the 
carrier taking much too long to handle their claims, this has generally been 

Many of our Medicare beneficiaries are unable to get to the local office 
of the Social Security Administration to receive assistance with their 
Medicare problems. Handling it by telephone calls is usually not satisfac- 
tory. They cannot get to the Social Security office because of some personal 
handicap, advanced age of the beneficiary, or lack of mass transit transporta- 
tion in their community. Many do not own cars, and many cannot drive the ones 
they might have had. It is particularly difficult for those living in rural 
areas. Many areas may have a toll free number to be used in seeking Medicare 
information, but it is forgotten by the time the individual needs this help. 

Some information has been made available through TV programs or commer- 
cials, newspapers and other public facilities, but it does not seem to meet 
the need. Some of our older people cannot read too well, some do not even buy 
the daily newspapers, many are not interested in TV, and some do not own TV 
sets. Some have hearing or visual handicaps which also prevent them from 
getting this type of information. 

I recently made a survey of the senior citizens attending the various 
meetings at which I appeared. I asked how many understood the Medicare 
program, knew how to fill out Medicare forms, or how to appeal cases that 
were rejected. Only one or two individuals had any real knowledge of the 
problems involved in submitting Medicare bills. Those who did, indicated 
they had acquired their knowledge through a "hit or miss" "trial and error" 
process when they were faced with the necessity of filing Medicare forms for 
reimbursement. Their first question was, "Why could we not have special 
meetings or programs to introduce us to the procedures necessary in filing 
Medicare claims?" 

We would like to see some local educational programs such as workshops or 
seminars, where our people could learn exactly what the Medicare program is 
all about in language they would understand. They could fill out sample 
Medicare forms to learn how it is properly done, act out a hearing for a claim 
they felt had not been properly handled and ask the questions that bother them 
the most. 

It would also be an excellent idea to develop an outreach program so we 
could make sure every Medicare beneficiary who needed assistance was given 
this help. 

Since many communities have nutrition sites, this outreach worker could 
service many individuals at one time if their visits were made at regular 
times. The same service could be given by an outreach worker who made routine 
visits to senior centers and a worker who might make routine visits at 
scheduled times to senior citizen housing units. 

Individuals who might be unable to attend meetings, and could not leave 
their homes because of health problems, handicaps and transportation problems, 
could be serviced by the outreach workers making individual house calls to 
assist such Medicare beneficiaries. 

Our Medicare beneficiaries want to be reimbursed for their health care 
expenses. There is little doubt that most of them do not understand the 
basis for denial of benefits, or why they receive reimbursement of their 
doctor bills at 80?o of a "reasonable cost." I have had many who were indig- 
nant when the Medicare reimbursement did not cover a full 1 00?o of their 
Medicare claims. When they appeal a case and end up with no more money than 
they originally received, they are angry, frustrated and disgusted with the 
program. Their attitude becomes, "I should have known you can't fight the 
government ." 

We know the problem exists. We know our Medicare beneficiaries are not 
getting the full benefit of the program. We know most of them do not really 
understand the regulations. This problem must be met with an early solution 
before the program becomes useless to many of our beneficiaries. 

It would seem logical to make it posible for them to receive the benefit 
of an educational program enabling them to deal realistically with the bene- 
fits of the Medicare program before submitting their claims, rather than wait 
until they become angry and frustrated when reimbursements do not meet their 

This could result in less cost involved in returning claims for investi- 
gation, fewer requests for hearings in review of claims, and reimbursements 
could be made more quickly and efficiently because the Medicare beneficiary 
understood how to properly fill out the required forms and submit bills. 


MR. 5L00: I think the real trick today is not to get them, but to keep 
them, as far as Medicare A and B and Medicaid is concerned. 

One of the first things I did in preparation for today's meeting was to 
go to the contract, which is the guiding document as far as contractors are 
concerned, so that I could define for you beneficiary services. 

Now, that's a very difficult thing for me to find in that contract. 
There is only one reference in that 30 page document to the subject of bene- 
ficiary services. This is under "Functions of the Intermediary," in Article 
2, Paragraph N, a small one liner, "upon inquiry, assist individuals with 
respect to matters pertaining to this agreement." 

Now, from this very brief, passing reference, there is a whole multitude 
of activities that spring forth, and all of these resources that are expended 
to support this function create an administrative expense of some magnitude 
for the contractor. 

This obligation is one of the most difficult for the conscientous 
contractor to perform. A byproduct of any business endeavor is the develop- 
ment of satisfied customers. This is a very difficult thing to accomplish, 
particularly in those cases, when, following program guidelines, the contrac- 
tor is not allowed to make payment in full or has to deny payment for a 
particular service. 

In the performance of this function, we are not dealing with pieces of 
paper, statistical data, preparation of reports, but we are dealing with 
living, breathing human beings who are often confused, anxious, irate and, 
many times, stretched to the limit of their endurance with something they 
don't understand. 

You're beginning to hear the same theme that has been permeated through 
the previous speakers and is also very obvious in my remarks. The crux of the 
matter is Medicare beneficiaries simply do not understand the program. The 
program is often maligned unjustly by Medicare beneficiaries as well as self- 
styled critics, basically because they don't understand the complexity of the 

In operations, we can do an awful lot to automate and make ourselves more 
efficient. We can try to secure source data entry for claims input. We can 
do a lot of things. But in the one on one function of beneficiary services, 
it is very difficult to automate that process. We can give our people some 
automated tools such as on-line devices to speed up their research and make it 
more efficient and more effective. But the real secret is how you perform 
better one on one relationships. 

Well, I think I would like to talk about some of those things a little 
bit later when I talk about how I think beneficiary services can be improved. 

Back to the misunderstanding theme. Medicare beneficiaries don't under- 
stand the application of terms such as deductibles, coinsurance, exclusions, 
reasonable and necessary, usual and customary, lifetime reserve days, economic 
index limitation, assignment, on and on and on. And you've heard this re- 
ferred to as a jargon -- and it is a jargon. It is the language and the tools 
of our trade. 


The basic truth is the Medicare program is a very complicated program to 
explain. The original legislation was complicated enough, but with 15 years 
of legislative changes, administrative decrees, well intended sophistication, 
we have created almost an administrative nightmare and a confusing program for 
the Medicare beneficiaries it was intended to serve. 

A little bit about Indiana Blue Cross and Blue Shield. We would probably 

be classed as an upper middle class contractor in terms of claims volume. I 

will relate my remarks basically to the intermediary side, as Peter is going 
to speak to the carrier aspects of beneficiary services. 

On the intermediary side, we have a ratio of about one percent inquiries 
to the number of claims processed. Now, you think that's a very good ratio. 
Well, it IS, because on the Part A side, which is primarily a vendor oriented 
program, there is not nearly as much confusion and as many opportunities for 
beneficiary interface as there is on the B side. 

I think if I can address those problems that we are encountering today, 
it may lead to some recommendations for solutions of some of these things that 
we can do down the road in the future. 

The Number 1 problem I have alluded to earlier is the lack of education. 
Many inquiries we receive are of a general nature. Sometimes new benefici- 
aries, just eligible for the program, who have not even filed a claim, want 
general information about the program. I would quickly point out to you that 
Medicare contractors do not have a contractual function to educate benefici- 
aries of the program, but, as a result of the transactions that we enter into, 
we are forced to play this role. If we are to have customer satisfaction, 
then we must interject ourselves into the role of educator. 

Another problem is the Medicare beneficiaries do not understand the 
provisions relating to skilled nursing care; the difference between custodial 
care and covered care precipitates many Part A inquiries. Given the fiscal 
considerations, I'm not sure that we can do anything at the program level to 
alleviate this problem. But, once again, I think it has to be attacked 
through education. 

A Privacy Act backlash is another thing that is creating problems for us 
in providing the services to beneficiaries. Many Medicare spouses simply 
cannot understand why they cannot secure information, and this is due to the 
Privacy Act which was primarily developed m the interests of the beneficiar- 
ies, but it has a backlash effect in not being able to allow them easy and 
ready access to information without the required informational releases. 

Another problem we've encountered is the lapse of time involved in the 
preparation of record of benefits used. This is done m Baltimore and it is 
usually several months after the Medicare beneficiary has received hospital 
services. They simply don't understand why four or five months later they 
would get this notice, and many of them have completely forgotten about the 
service that was rendered. 

Now, those are some of the problems. What can we do to try to correct 
those problems and improve the beneficiary services? 


Contractors can, I believe, do many things, but first they have to be 
motivated to do those things. Because of constant pressure on administrative 
cost considerations, contractors are reluctant to spend monies unless the cost 
benefit is attendant. 

The following are some examples of things that 1 think we can do to 
expand our services and still meet administrative cost standards and appear 
favorable in certain cost comparisons that everyone is interested in now. 

I think we can establish closer liaison with local senior citizen groups, 
primarily to conduct instructional classes pertaining to the program. The 
intermediary will not gain as much in administrative cost reductions from this 
activity as the carrier will because of the vendor initiated claim aspects of 
the Part A program. But, still, if we can conduct an educational program, we 
may cut down significantly on those inquiries that we might receive later 

The Intermediary can establish an ongoing set of initial meetings with 
new beneficiaries by working with the local Social Security office. Faster 
updating of the Medicare handbook, which has been referenced earlier, would be 
a valuable assist to the contractors in these types of activities. 

Another thing is that we can simplify the reconsideration process. On 
those cases that require medical review, a very lengthy document is sent to 
the beneficiary to explain to him/her how the initial decision was made and 
how the review decision was made. For the most part, the Medicare benefici- 
aries do not understand this very lengthy document. 

I think we could develop, if given the opportunity, a very simple, short, 
plain language response to these requests for appeals, particularly on 
institutional services. 

I alluded earlier to the lapse of time in preparation of record of 
benefits used reports. These could be, m my opinion, prepared at the local 
intermediary level, which would cut down significantly on the time lag. 

One last observation. In the future, if Medicare contracts are to be 
awarded on a competitive bid basis — and that seems to be what is going to 
happen -- I don't believe that some functions should be part of that bid 
process. If prospective contractors who submitted a fixed price bid on the 
production related contractor duties could also include in that bid their 
willingness and qualifications to perform beneficiary services and other 
adjunct support activities, then these services could be agreed to outside the 
base contract . 

After the selection of the winner, the winning contractor would then 
submit a work plan as to how he would perform these beneficiary services. The 
work plan would be a detailed listing of activities that he proposes to 
provide under the function of beneficiary services, with a cost projection for 
each of these activities. This would allow HCFA to negotiate with that 
contractor for the level of beneficiary services that they actually want 
provided . 


In closing, it seems apparent that those contractors who will promote a 
better understanding of the program will be those contractors who can provide 
better service to the beneficiary. When that occurs, the Medicare program can 
be elevated to the stature that it justly deserves in the eyes of the popu- 
lation that it was designed to serve. 

MR. HANNA: In introducing Peter Mills, who will speak to us on benefici- 
ary services from the point of view of the Part B carriers, you should know 
that Occidental in Southern California is one of the giants in the Part B 
program; they have a huge operation, and I know they are doing a lot m this 

MR. MILLS: I would like to draw your attention to this display board 
and, as you can see in our centerfold, we have a typical Southern California 
couple, sitting in the sunshine, and because of our recent heavy rains, you 
can see in the background their house sliding gently down the hill in a sea of 

Well, I'm afraid we can't do much at Occidental to help them about their 
house, but at least we can help them with Medicare. This is why at 
Occidental we say, we put the "I care" in Medicare. 

In serving over a million beneficiaries m Southern California, we 
maintain a mix of beneficiary activities and we continue to add these as 
we add other projects. 

I feel these activities fall into two basic categories. First, there are 
those items that are required by the Health Care Financing Administration, and 
Don Sloo referred to many of these, such as, correspondence, telephones, and 
of course, walk-ins. 

We are very fortunate with the walk-ins at our Medicare office. The 
Occidental Center happens to be one of the Los Angeles downtown bus stops. 
Those of you who are familiar with this know what I mean, when you are next to 
a bus stop. Los Angeles has a 15 cent mmi-bus service from anywhere in town, 
so we have a great population descending upon us. 

These three areas; correspondence, telephone and walk-ins, can be cate- 
gorized, qualified, and counted. They can be measured and evaluated. The 
sophistication the carrier uses in handling these services really depends on 
the type of system that the carrier has and this ranges from a simple one on 
one relationship, to a total on-line control system. 

The second part, which I believe is perhaps the most important, are the 
items that we do because there is a need to do them. These activities, 
themselves, fall into two categories: those that take time and cost money, 
and other activities that I refer to as "freebies." These are the little 
things that you and I and we can do, as carriers, that will help the benefici- 
aries and, at the same time, do not cost a great deal of money, but do have a 
tremendous payback. 


Let's take a look at some of the things that we've been doing in 

Several years ago, we started what we call a speakers' bureau, and we 
asked our employees if they would like to go out and speak to some of our 
senior citizens' groups. We'd been working with the various senior citizens 
associations, and had been sending speakers out, but thought we would augment 
this by asking our employees to participate. We had over fifty people say, 
"Yes, I'd like to go out and speak." 

We worked with our employees and gave them training and help; so they now 
have spoken to thousands of beneficiaries ranging from groups of three or four 
people to groups of 200 or more. 

One of the key elements of this program has been that the speakers we use 

are not professionals; they are basically ordinary people who work in the 

office on a day to day basis, but they can relate to the beneficiaries very 

Perhaps one of the most important benefits we've got from this program is 
not just the speaking, but the listening . Our employees come back and say, 
"Hey, you know there are real people out there. They are not claim forms, not 
bits of paper. They are actually real people out there with real problems. 
Many are very ill, and some are in pretty good health; but there are still a 
lot of people who need help." 

And this really puts a little bit of heart into your operation. 

We also have established a beneficiary outreach program where we enlist 
the help of senior citizens to work with their peers. Some people refer to 
them as beneficiary aides or volunteers; however, whatever you call them, this 
has proved to be an extremely effective method of communicating with the 
beneficiaries. These volunteers are available once or twice a week at a local 
community center where we provide them with some basic Medicare training. One 
of the things we do not do is try and teach them everything about Medicare. 
The general function is to help senior citizens complete claim forms, under- 
stand the EOMB and give them information on how to request a review. The 
volunteers do not try to answer complex claims problems. What we have done is 
to establish a telephone "hotline" so that the volunteer may call a qualified, 
trained individual who can give them the information over the telephone as it 
pertains to the particular beneficiary's concern. 

The outreach program is highly effective, and we feel that this "low key" 
approach is getting good results. 

Coming from the western sunbelt, we obviously have a great number of 
retirement communities, and we've worked with the Leisure World in California. 
They have their own closed circuit TV to all the houses (over 20,000 people). 
We have had an opportunity to be on a panel answering questions about 
Medicare; the residents could phone directly in to the panel and ask their 
questions right there on TV. This was a very exciting and informative 

Many of the carriers have used EOMB enclosures. This is an item that 
does not cost anything to mail, and the printing costs are certainly worth- 
while to provide information to the beneficiary on filing claims. 


While we are talking about enclosures, there are also a multitude of 
enclosures already- available from SSA/HCFA. 1 think of them as "freebies", 
because they are generally no cost to the carrier. 

Another item that we have put up on the display board is the "old 
shoebox" claim. This happens to us every year; beneficiaries save up their 
claims and then at the end of the year, mail big fat packages. We send 
letters to beneficiaries to suggest that it might be helpful to them to send 
in claims more frequently rather than hold till year end, as it also benefits 
them to receive payments as the expense is incurred, and at the same time 
makes it easier for us to complete the claims. 

Another "freebie" is the health fairs. Probably because we have so much 
fair weather in California (on the contrary to what the news media says), we 
have a lot of health fairs. These fairs are often conducted by senior 
citizens' groups, State health associations, and various other civic organi- 
zations. Whenever we can, we try to participate by setting up a booth and 
providing blown up RFP that has a plastic cover on it. We can show people 
very effectively how to complete the RFP. In one particular gratifying 
occurence at a health fair, we met a gentleman who had been on the program for 
eleven years and had never filed a claim, despite many medical bills; we were 
able to help. 

An extension of this is what we call Medicare on Wheels. This is going 
out of the cities and into the rural communities. Again, here we can work 
with the senior groups and also with the Social Security Administration 

Though the Medicare activities in the Social Security offices may be 
diminishing, they do have an excellent knowledge of their local area. They 
are extremely helpful to direct you to who can help you set up the meeting. 
Medicare on Wheels is really just a jazzy name for getting out into rural 
areas and helping the beneficiaries. The SSA offices and the local senior 
citizen groups are very helpful in working with you to put ads on TV. We have 
always found that the local radio stations are pleased to cooperate. In many 
of the small areas you will find attendance to Medicare meetings in the 200 
to 300 range. 

I would like to move on now to a new area we refer to as "at a time of 
need." When a beneficiary dies, there is a tremendous problem for the next of 
kin to understand and complete the requirements for handling the claims. 

As a carrier, we are not in a position, at this point in time, to change 
the law regarding unpaid bills, but we can change the way in which we handle 
the claim. We do have a problem in this area. We've been getting many of 
these claims in and there is a lot of correspondence back and forth, a lot of 
misunderstanding; so we thought, why not have the claims come in right the 
first time? Why don't we contact the next of ,kin prior to the time they 
submit a claim? 

And where do you do that? At the mortuary, at the funeral home. 

We've set up a pilot project with the local funeral association, and they 
will, in turn, give the next of kin a self mailer that will come to us. We 


then send out a brochure containing all the forms, all the requirements, a 
phone number the next of kin can call, and hopefully, the claims will come m 
properly completed. 

We're also working with the Social Security Administration, the local 
office in that area, because they are very anxious to help. They work with 
the next of kin because there are social security benefits which are generally 
available . 

I'm looking forward to some really great things with that program. 1 
think it has the potential to be regional in scope, and perhaps national. 
I am going to be interested in following it down the road to measure the 

The whole key to beneficiary service is communication; the way in which 
you relate to the beneficiaries. It is not just one massive program, but all 
the little things that we do that fit together. 

We're looking forward at Occidental to starting a program where we will 
receive the claims from beneficaries, notifying us that they have some comple- 
mentary coverage or Medigap coverage; we will be able to send a magnetic tape 
record on to their private insurer. Some of the carriers are now doing this 
and 1 know our panel moderator's company has done some fine work in this 

Let's take a look at our display board again. Where are we going to be 
in Medicare a year from now, six months from now? I can see our senior 
citizens sitting there m the lovely California sun — well, wait a minute, 
I'm sorry, they are probably not sitting this time. Let's see, last year it 
was the fires; this year, it was the rain; next year we'll probably have an 
earthquake and it will demolish the bench; so they'll have to stand. 

However, if we've done our job as a Medicare carrier, if we've communi- 
cated well, if we've paid our Medicare claims promptly and graciously, then 
perhaps they'll continue to say, "Thank goodness we've still got Medicare." 

MS. SCHOENI: The Department of Health, Education and Welfare launched, 
in September of 1978, a program to encourage all Americans to seek a second 
opinion before undergoing nonemergency surgery. 

The purpose of that program is to expand the knowledge a patient has 
about his or her own health, to improve the overall quality of care, and to 
deal with the problems of unnecessary surgery. 

The definition of "unnecessary" as it applies to surgery, and the ques- 
tion of exactly how much such surgery is being performed, are matters of 
considerable debate. Estimates of how much unnecessary surgery is performed 
range from one percent to 30 percent, with the figure higher for specific 
surgical procedures. 


The variations in rates of surgery among different geographical locations 
and in different health systems have been identified in a number of studies 
over recent years. The overall rate of surgery, for example, is 31 percent 
higher in the Midwest than in the South. 

In Federal employee benefit programs, twice as many operations are 
performed on the fee for service patients as on those enrolled in HMOs. 

We know that between 1970 and 1978, the number of surgical procedures 
increased 33 percent in the United States, and that the rate of surgery is 
growing four times faster than the population. 

Between 1966 and 1976, there was a 44 percent increase in the rate of 
surgery for people over 65. 

The Moss Subcommittee, two years ago, used a 17 percent figure as the 
rate of unnecessary surgery in Medicaid, and concluded that there were approx- 
imately 2.38 million surgeries that were unnecessarily performed under 
Medicaid at a cost of over $3 million. 

The program that we have launched has four elements: first, is the 
public information activities to acquaint the public with the advisability of 
seeking a second opinion; a nationwide referral mechanism to provide access to 
local referral sources to obtain second opinions; two demonstration projects 
to learn more about a number of issues related to surgical care and second 
opinion programs; and an evaluation project to assess the impact of second 
opinion programs on the rate of surgery and on the costs to the Medicare and 
Medicaid program. 

Because there is no single organization capable of serving as a national 
referral source, HEW worked with a number of local and voluntary programs to 
make second opinions more available to those patients who desire them. The 
program, as conducted by HEW, is not limited to Medicare/Medicaid benefici- 
aries, but is aimed at all patients faced with the possibility of having 

We've established a national hotline to direct patients to local re- 
ferral centers. The Social Security Administration district offices and local 
welfare offices also direct consumers to local referral centers. 

Local groups have developed lists of physicians willing to give second 
opinions and provide callers with several appropriate local physicians. The 
patient has the final responsibility, of course, to follow through on the 
referral and to get the second opinion. 

While we don't know how many physicians are participating or have agreed 
to participate in the second opinion program, we know that there are over a 
hundred thousand physicians that have indicated their willingness to do 

Many groups have taken an active role in implementing the second opinion 
program, either by being the referral source or by helping with other aspects 
of the program. Twenty-seven PSROs, 68 medical societies, and 43 carriers 
serve as the referral centers for a total of 151 throughout the country. 


The public information material that we have developed is built around 
the concept that the individual has a role in his or her own health and has a 
responsibility for his or her health care. In all the materials, we first 
encourage the patient to ask their own doctor to recommend another physician 
for a second opinion, or call our HEW hotline. The toll free number is 
available 24 hours a day, seven days a week, and will refer the caller to the 
local referral center. 

We have printed and distributed five million copies of our second opinion 
brochure since January 1, 1980, when we went into our second phase of the 
second opinion program. We are now in the process of printing two million 
additional copies of the publication. We have a Spanish version of that 
brochure. In the first three weeks after we launched this second phase of the 
campaign in January 1980, we received individual requests for 1.5 million 

We have received a number of requests from insurance companies for 
quantities of the brochures to send to all their policyholders. We have also 
developed a poster with the slogan, "Thinking of having surgery? Think about 
getting a second opinion," and indicating the hotline number. We are now in 
the process of translating the poster into Spanish, and it will be used in 
Puerto Rico and other parts of the country. 

We have developed a series of TV and radio spot announcements, using 
actor Cliff Robertson. These spots are receiving good airing at the present 
time. CBS used them last weekend on network in prime time on both Saturday 
and Sunday. Those radio and TV spots have been distributed to 700 television 
stations and 6,000 radio stations throughout the country. Most of the spots 
carry the hotline number; some carry the tag, "Write Surgery, Washington, 
D.C., 20201, for additional information." 

In addition to the national program, we are conducting two demonstra- 
tion projects, one in Detroit and one in New York City. These demonstrations 
are being conducted under contract to Blue Cross and Blue Shield in each of 
those areas. These two demonstration projects are aimed at the Medicare 
population, which involves about two million beneficiaries in the Detroit and 
New York areas. 

In these two demonstrations, all copayments are being waived, so the 
second opinion will be free to Medicare beneficiaries. The physician referral 
centers actually assist the patient m finding another physician. In addition 
to giving the names of the physician, in the demonstrations, the referral 
center actually follows through and helps — either makes or helps make the 
appointment with the physician and follows up to see that the patient gets 
there, even providing transportation, if necessary. 

Thus, m the demonstrations, we are going further than we go m the 
national program. 

In addition, in the two demonstrations, there is an intensive consumer 
education program. In the New York demonstration, they are using mass media, 
including New York Times ads and TV spots, to get people into the program. 
In Detroit, they are using community groups to achieve that end. 


The demonstration projects are aimed at providing data in sufficient 
detail to evaluate the impact of second opinion programs on surgery rates, the 
costs and the quality of care; to determine whether a waiver of coinsurance 
and deductible liability associated with a second opinion results in increased 
utilization of the benefit; and to assess how the structured program approach 
of the demonstration contributes to the cost and manageability of the second 
opinion effort, as compared with the general awareness kind of campaign that 
we are doing on a nationwide basis. 

The HEW evaluation project is a major effort to learn more about a number 
of unresolved issues relating to surgery. The evaluation project will focus 
in particular on the effect of second opinions for nonemergency surgery on the 
rate and cost of surgery. 

We have awarded a contract to evaluate the two demonstration programs, 
the Medicaid second opinion program in Massachusetts, which is a mandatory 
program, and our general awareness, nationwide program. The total evaluation 
IS expected to run for four and a half years. 

As I mentioned, in that evaluation we are evaluating the Massachusetts 
mandatory program. The program has been going since 1977 in some parts of the 
State, later in other parts of the State. Results from the first 14 months of 
that project, in which second opinions are mandatory for eight procedures, 
indicate there has been a 20 percent reduction in the rate of surgery among 
the Medicaid population in Massachusetts as a result. Thus, they are project- 
ing considerable savings from the second opinion program. 

We developed our second opinion program after discussions with the 
medical, hospital and insurance groups and, where possible, we have incorpor- 
ated their views and their concerns into our final program and into our final 
publicity for that program. 

The American Society of Internal Medicine passed a resolution some time 
ago encouraging second opinions. The American Medical Association tradition- 
ally has supported the concept of second opinions, although they opposed a 
recent amendment that would have permitted demonstrations of mandatory second 
opinion programs by the Health Care Financing Administration. 

The American College of Surgeons has been opposed to the second opinion 
program from the beginning and remains so. 

Several third party payors' plans, including many of the Blue Cross Blue 
Shield and private plans, also are encouraging second opinions actively, in 
addition to paying for them. 

The next step in our second opinion effort is that we are going into 
certain cities in the United States m which the PSROs have identified that 
the rates of certain surgical procedures are higher than the national average. 
We will target spots to see if we can have any impact on those surgical 
procedures in that area. 

The first two procedures that we will target are cataracts and prostate 
surgery. We are going to Houston and into a small town in West Virginia with 
the prostate spots, and we are going into Tampa and Philadelphia with the 
cataract spots. 


MS. TYSSOWSKI: My personal view is that the most worthwhile thing we 
could do to improve beneficiary services is to amend the law; i.e., to require 
physicians to accept assignment if they wish to participate in the Medicare 

As you know, this is an old legislative proposal that keeps being bandied 
about. And there has always been a concern as to whether this might be a 
disservice to beneficiaries in the sense that you wouldn't get enough physi- 
cian participation. Personally, I don't think so. Also, I wanted to mention 
that this legislative proposal is somewhat linked, in HEW legislative 
planning, with the Statewide fee schedule idea. HEW is planning to have 
discussions throughout the country on the fee schedules, and perhaps link with 
it the requirement that physicians who participate in Medicare must take 
assignment in all cases. 

A few years ago, I heard that the difference between what physicians 
charged the beneficiary and what Medicare approved, the amount beneficiaries 
had to pay out of their own funds, amounted to over $700 million. By now the 
figure has probably hit the billion mark. Additionally, because Medicare is 
so difficult to really communicate in all aspects, we may be better off with a 
vendor type program on the Part B side. 

Another aspect of our problem with beneficiary relations and services in 
the Medicare program is the shared responsibility with the Social Security 
Administration. This relationship has made it difficult for contractors to 
know exactly what their role is. 

When the Medicare law was first enacted, the Social Security Administra- 
tion had the philosophy that the only face to face contact with the benefici- 
aries was to be done by the Social Security district office. The Social 
Security district office had the responsibility for outreach and for education 
of the beneficiaries. So the total beneficiary relationship was the responsi- 
bility of the district office rather than the Medicare contractor. 

As time passed, people began going directly to the Medicare contractor, 
particularly the carriers, when they needed an answer as to the status of 
their claim or why a claim was denied. This information wasn't available at 
the district office. As beneficiaries moved in that direction, we began 
making the carrier more accessible by installing toll free lines. On the B 
side, lines were installed beginning October 1978, and we are now preparing 
for toll free access on the A side. 

We've gone through an evolutionary process and as we move toward defining 
the contractor role in more specific terms we should establish what is 
expected of the contractor. 

In closing, I'm pleased to tell you that the EOMB redesign proposal is 
coming out for the second and last round of comments. In the interest of 
trying to reduce jargon and help make the program more understandable for the 
beneficiaries, your ideas are welcomed. 


MR. HANNA: Really just one thought to leave with us: I talked about the 
spirit and the letter, and I think you will all agree with me that the spirit 
was here this morning with respect to looking after the beneficiary. 

I just hope that the flesh is willing. And let me suggest that you 
substitute the word "budget" for flesh; and I hope really that those of us in 
this room who are the management group, the decisionmakers, will not take the 
easy road saying, "Well, if we can save a couple of pennies on the unit cost, 
let's just dump outreach." I hope that none of us take that step, because I 
do not believe it would be in the interests of the program. 



Charles W. Stewart 
California Physicians Service 

Earl M. Collier 
Deputy Administrator, HCFA 

MR. STEWART: You've heard an awful lot of information the last couple of 
days. It's one of the first times I've ever had the opportunity to retrospec- 
tively look at the 1980's. Paul Willging opened this thing up by telling us 
that he had worked for eight administrators in five years. It wasn't clear if 
that was a threat to Len Schaeffer or not, but he did say that Leonard was the 
first one that had a clear view of where he was going. 

Leonard came on then and described a future that showed consolidation of 
the contractor areas, reallocation of functions, new technology, increasing 
efforts to hold down costs of all kinds, increased competition, more stringent 
standards, more experiments, and increased pressure on the provider community 
for better quality. Now, that was the bad news. 

The good news was that most of us won't be around. 

The Under Secretary came next and told us that the Federal role won't 
diminish m the 1980 's, but ours would. 

It is presumed by almost all of our speakers that the competitively bid 
contracts are going to be the rule and not the exception m the 1980 's, and 
perhaps that's true. If it's true, John Larkin Thompson told us that it is 
absolutely necessary that we find a way to get those kinds of contracts 
clearer and that a lot of work is necessary there. I tend to agree. 

It is also clear from the speakers in the last two days that the jury 
is very much out on how effective such contracts are in controlling cost of 
benefits, and their long term impacts on both administrative costs and the 

Les Alberthal and John Buelt told us that they concurred on the need for 
longer term contracts, with reduced risks on noncontrollable items. I will 
have to agree that I think that's appropriate, but I think it also ought 
to apply within the existing cost reimbursement contracts, to many of the 
supplier contracts we now find ourselves forced to rebid on much too frequent 
a basis. 

We also need to see Mr. Buelt 's project team report. Anybody who can do, 
in three or four months, what we've been debating now for years deserves a lot 
of scrutiny. I'm really somewhat concerned that it seems to be an unknown 
report as far as the majority of you are concerned. He commented that he had 
done a survey of some 13 various contractors and others, and that was the 
basis on which the report was done. My little survey during the cocktail 
hours is somewhat hazier, probably, than his; and therefore, did not disclose 
anyone who had seen the report and no one who would admit to having been an 

I would urge that you get the report. I would urge that you read it 
carefully, and I would urge that you comment on it just as carefully. 

Mr. Schaeffer and Mr. Buelt both called for innovative systems approaches 
in order to hold down costs and keep our productivity improving, and I would 
have to agree that's the only hope for the future. However, it is also 
clear from the other comments that the current ACER and performance rating 
mechanisms tend to penalize innovation and create substantial risk for those 


who are imprudent enough to innovate. We need to look at that, and we need to 
look at the role of the ACER as part of the bid evaluation mechanism, because 
that was clearly seen by a number of your speakers as questionable and worthy 
of considerable review. I think that's something that the Carrier Representa- 
tive Group needs to do in the near future. 

Ed Werner, perhaps, made one of the most important observations of the 
entire meeting, and that is that the program no longer fulfills the promises 
that it early on made to the beneficiary; that the constant shift of the costs 
of the program to the beneficiary over the last ten years simply has to be 
removed, or else we are going to have a circumstance where, no matter who is 
associated with Medicare, it's going to get a foul name with the public. 

Duke, however, gave us lack of encouragement in that regard, because he 
described the 1980 's as a time of restricted resources, and sounded a little 
like our governor in California. 

Peter Fox, however, tended to corroborate that comment, and made what may 
be the three most important points of the entire conference when he said, 
first, that reimbursement practices and manpower planning have to be tied 
together if we are going to see any improvement. He also pointed out, second, 
that there is a significant drain of tax dollars to the aged and to the 
Medicaid programs, and if this continues at the rate it has, it will create 
profound social pressures and change. I suspect that is something we'd all 
better take to heart and use as a goad to improve our performance. 

And the last point that he made, this third point, was that the demand 
for more and better data will create pressures on the payment mechanism 
and all other data resources that we are simply going to have to cope with; 
it's not going to go away. 

Now, out of all that grew some considerable comment about too many 
doctors and the fact that this was raising costs. The alternative seemed 
to be to restrict access to the kind of training that physicians get prior to 
receiving their license. And I have to tell you that is very discouraging to 

The kind of people who go through that training, who come out into the 
community, are very valuable people to us in our operation, with or without 
that M.D. after their name. Whenever you talk to somebody, you hear much talk 
about underserved areas, and so forth. There's no way that we are taking 
advantage of that over supply, if there is one, to see that those areas are 
served. I think there needs to be some innovative thinking on the part of the 
planners in this regard, as well. 

I don't see why you can't train these people and then put in stringent 
exams so that only the very best of them are licensed to practice and thus 
control your people who are actually offering fee for service or other direct 
care. And then maybe provide an apprenticeship program so that a few more can 
be licensed if they go through an underserved area. However, a lot of think- 
ing has to be done rather than simply shutting down a training structure that 
has now been built, and has cost us a lot of money to come by. 


John Jansak told us about standards and the Washington Senators. I can 
tell 3ohn exactly what the problem was with the Senators, because I grew up in 
Sacramento. We also had a team called the Senators. Our pitchers were always 
looking for a consensus and our batters were affected by adverse hot winds 
blowing from the capitol. 

I think we can all endorse the new performance standards, once we get 
them out, but I would have to say that Mr. Rinehimer's comments about the need 
to look at those things carefully and with a somewhat less than statistical 
eye, need to be given a lot of consideration. 

I think also that they are like anything else that we've designed care- 
fully, modeled, and given a lot of thought to, in that when we put them into 
practice, there had better be an awful lot of looking at the results before we 
begin to rely on them for decisions. 

Don Nicholson talked about his program validation project, and asked us 
to be partners in applying it, and 1 think that's appropriate. However, I 
would point out again that this was one project where there was a real failure 
to work with the carrier community in the design prior to making that package 
available in the field. Participation will be slower to come as a result. 

In summing up then, the key elements that we need in the 1980 's are 
really almost exactly the same as were needed in the 1970 's. We've got to 
have a real information exchange and planning effort between the government 
and the private sector, not the spotty approach we've seen in the past, and it 
requires a lot better followup if a good faith exchange is going to exist 
between us. 

Consultation has improved, and I commend HCFA for the papers that they 
distributed here and for the conference, itself. We've got a long way to go. 
I hope we'll build on this conference and not abandon it again for four years 
until another election is in process. 

The carriers and the fiscal intermediaries also have a lot to account 
for, and we need to be more consistent and respond much more completely when 
we are asked for comment. The carrier rep group frequently asks you to 
provide comment, agenda items and feedback. You're pretty poor. You don't 
provide that comment, in many cases, and, when you do, it's less than ade- 
quate. You've got to get better if you expect the government to regard you as 
the experts that you are. 

We also need to truly take up Mr. Schaeffer on his statements that HCFA 
should favorably impact the private costs of health care as well as govern- 
ment's. If they manage to do that, it will be a real departure from the 
previous posture of taking the most favored position, and to hell with what's 
going to happen in the private sector. 

I'm encouraged, however, by his statement that that's what he plans to 
do, because the shifting of cost to employers in the private sector simply can 
no longer occur now that government has assumed what Mr. Stark described as 
its increasing role in the health care field. 

And, lastly, perhaps most importantly, it is clear that during the 
1980 's, we have got to find a way to keep the program's purpose of serving the 
beneficiary foremost in all our minds. 


I'd like to thank Duke Collier and Leonard Schaeffer for the attendance 
of all the high level staff we've had here, and Mary Kenesson for the arrange- 
ments. I hope we can do it again. 

MR. COLLIER: I'll be brief. I felt like I was up there all day yester- 
day, and I've said pretty much what I have to say. I wouldn't want to try to 
add to Chuck's first rate summary of this conference. 

I think our expectations for the conference were somewhat mixed, but we'd 
hoped, at a minimum, that we would have in one room people who are concerned 
both from the contractor side and the HCFA side about the administration of 
the program, and that we would be able to stimulate a certain amount of 
communication between us, and I think that expectation has been fulfilled. 
Our hope will be that more and more communication will characterize the 

If there is a final truth to be learned from this session and from 
anything else that I think we've been involved in, it is probably that these 
are difficult matters. They are not necessarily well understood in our 
program administration, either in the substance of what we do or the way in 
which we do it. They are not necessarily matters as to which there is a right 
or wrong at any given time, but only the best judgment that reasonably in- 
telligent and reasonably well meaning people can hit upon after they've batted 
their heads against each other for a while. 

You can look for more and more willingness on our part to bat our heads 
against yours, and our commensurate expectation that you'll be willing to come 
to the table with us. 

I think that the substance of what we've touched on in this conference is 
a matter of greatest importance for the country in the next decade. I hope 
that we can continue to work in the spirit that I found, at least, in this two 
day period; a spirit of some good nature and relative open-mindedness. 



Projects Leader 
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Concord, New Hampshire 03306 


Senior Vice President 

Blue Cross/Blue Shield of Colorado 

700 Broadway 

Denver, Colorado 80273 


Senior Vice President 

Blue Cross of Georgia/Columbus, Inc, 

2357 Warm Springs Road 

P.O. Box 7368 

Columbus, Georgia 31908 


Vice President 

West Virginia Hospital Serv., Inc, 

20th & Chapline Streets 

Wheeling, West Virginia 26003 

Executive Vice President 
Health Care Service Corp. 
233 North Michigan Avenue 
Chicago, Illinois 60601 


Medicare Coordinator 

Blue Cross/Blue Shield of Utah 

2455 Parley's Way 

P.O. Box 30270 

Salt Lake City, Utah 84125 


Vice President 

Group Health, Incorporated 

326 West 42nd Street 

New York, New York 10036 



Medicare Operations 

Assoc. Hospital Serv. of Maine 

110 Free Street 

Portland, Maine 04101 



Government Programs 

Connecticut General Life Ins. Co. 

900 Cottage Grove Road 

Bloomfield, Connecticut 06002 


Senior Executive Vice President 

Mutual of Omaha Insurance Co. 

P.O. Box 456 

Downtown Station 

Omaha, Nebraska 68101 


Vice President 

Blue Cross/Blue Shield 

of Kentucky, Inc. 
9901 Lmn Station Road 
Louisville, Kentucky 40223 


Intermediary-Carrier Attendees 


Vice President 

Blue Cross of Georgia/Columbus, Inc. 

2357 Warm Springs Road 

P.O. Box 7368 

Columbus, Georgia 31908 


Vice President & Washington Counsel 

Health Insurance Association 

of America 
1750 K Street, N.W. 
Suite 805 
Washington, D. C. 20006 


Vice President 

Blue Cross of Western New York, Inc, 

298 Main Street 

Buffalo, New York 14202 


Executive Administrator 

Washington Physicians' Service 

4th & Battery Building, 6th Floor 

2401 4th Avenue 

Seattle, Washington 98121 


Vice President 

Hawaii Medical Service Association 

1504 Kapiolani Boulevard 

P.O. Box 860 

Honolulu, Hawaii 96808 



Blue Cross/Blue Shield of Georgia/ 

Atlanta, Inc. 
3348 Peachtree Road, N.E. 
P.O. Box 4445 
Atlanta, Georgia 30302 

Vice President 
E.D.S. Federal Corp. 
7171 Forest Lane 
Dallas, Texas 75230 


Vice President 

Blue Cross of Memphis 

85 N. Danny Thomas Boulevard 

Memphis, Tennessee 38103 


Vice President 

Associated Hospital Service of Maine 

110 Free Street 

Portland, Maine 04101 


Vice President 

Blue Cross/Blue Shield 

of Massachusetts, Inc. 
100 Summer Street 
Boston, Massachusetts 02106 


Vice President 

Blue Cross of Southwestern Virginia 

P.O. Box 13047 

3959 Electric Road, S.W. 

Roanoke, Virginia 24045 


Vice President 

Medicare A, Government Programs Div. 

Blue Cross/Blue Shield Association 

840 North Lake Shore Drive 

Chicago, Illinois 60611 



Government Programs 

Blue Cross of Southwestern Virginia 

P.O. Box 13047 

3959 Electric Road, S.W. 

Roanoke, Virginia 24045 

Senior Vice President 
Louisiana Health Serv. 

& Indemnity Co. 
P.O. Box 15699 
Baton Rouge, Louisiana 70895 


Vice President 

South Dakota Medical Service, Inc. 

1601 West Madison 

Sioux Falls, South Dakota 57104 


Vice President 

Blue Cross of Western Pennsylvania 

One Smithfield Street 

Pittsburgh, Pennsylvania 15222 


Intermediary-Carrier Attendees 


Senior Vice President 

Blue Cross of Kansas, Inc. 

1133 Topeka Boulevard 

P.O. Box 239 

Topeka, Kansas 66601 


Executive Vice President 

Blue Cross/Blue Shield of Kansas City 

P.O. Box 169 

Kansas City, Missouri 64141 



Pennsylvania Blue Shield 

P.O. Box 65 

Camp Hill, Pennsylvania 17011 


Vice President 

E.D.S. Federal Corp. * 

Washington, D. C. 20203 


Vice President / 

Health Care 

Nationwide Mutual Insurance Co. 

P.O. Box 1625 

Columbus, Ohio 43216 


Vice President 

Blue Cross Hospital Service Insurance 

of Missouri 
4444 Forest Park 
St. Louis, Missouri 63108 


Executive Vice President 

Pennsylvania Blue Shield 

P.O. Box 65 

Camp Hill, Pennsylvania 17011 


Vice President 

Blue Cross of Northeast Ohio 

2066 East Ninth Street 

Cleveland, Ohio 44115 


Medicare Coordinator 

Blue Cross of Northeastern Pennsylvania 

Blue Cross Building 

70 North Main Street 

Wilkes-Barre, Pennsylvania 18711 



Blue Shield 

Mutual Medical Insurance, Inc. 

120 West Market Street 

Indianapolis, Indiana 46204 


Vice President 

Hospital Service Plan of New Jersey 

33 Washington Street 

Newark, New Jersey 07102 


Assistant Vice President Operations 

Hospital Service Plan of New Jersey 

33 Washington Street 

Newark, New Jersey 07102 


Executive Director 

Seguros de Servicio de Salud de 

Puerto Rico, Inc. 
GPO 3628 
San Juan, Puerto Rico 00936 


Senior Vice President 

Government Programs 

California Physician Service 

(Blue Shield) 

No. 2 Northpoint 

San Francisco, California 94120 

Assistant Vice President 
Associated Hospital Service, 
401 West Michigan Street 
Milwaukee, Wisconsin 53203 

Senior Vice President 
Blue Cross/Blue Shield of 

Mississippi, Inc. 
P.O. Box 1043 
Jackson, Mississippi 39205 



Intermediary-Carrier Attendees 



North Dakota Blue Cross 

4510 13th Avenue, 5.W. 

Fargo, North Dakota 58121 



Medical Units 

Dept . of Institutions, Social 

Rehabilitative Services 
P.O. Box 25352 
State Capitol Station 
Oklahoma City, Oklahoma 73125 


Senior Vice President 

Blue Cross/Blue Shield of 

Florida, Inc. 
P.O. Box 1798 
Jacksonville, Florida 32201 


Vice President 

Blue Cross of Western Iowa & 

South Dakota 
Third & Pierce Streets 
Sioux City, Iowa 51102 



Federal Programs 

Blue Cross/Blue Shield of Nebraska 

P.O. Box 3248 

Mam Post Office Station 

Omaha, Nebraska 68180 

Vice President, Claims 
Medical Service of D.C. 
550 12th Street, S.W. 
Washington, D. C. 20024 



Blue Cross/Blue Shield of Colorado 

700 Broadway 

Denver, Colorado 80273 


Medicare Coordinator 

Blue Cross of Greater Philadelphia 

1333 Chestnut Street 

Philadelphia, Pennsylvania 19107 


Director, Medicare A Operations 

Aetna Life and Casualty 

151 Farmington Avenue 

Hartford, Connecticut 06156 

Vice President 
Blue Cross of Oregon 
100 S.W. Market Street 
P.O. Box 1271 
Portland, Oregon 97207 



Blue Cross/Blue Shield of Tennessee 

Blue Cross Building 

Chattanooga, Tennessee 37402 



Blue Cross/Blue Shield of Rhode Island 

444 Westminister Mall 

Providence, Rhode Island 02901 


Director, Medicare Programs 

Hospital Care Corp. 

1351 William Howard Taft Road 

Cincinnati, Ohio 45206 


Vice President 

The Equitable Life Assurance Society 

of the U.S. 
1285 Avenue of the Americas 
New York, New York 10019 



Blue Cross/Blue Shield of Alabama 

450 Riverchase Parkway, East 

Birmingham, Alabama 35298 



Blue Cross of Western New York, Inc. 

Blue Cross Building 

298 Main Street 

Buffalo, New York 14202 


Intermediary-Carrier Attendees 


Senior Vice President 

Blue Cross of Greater Philadelphia 

1333 Chestnut Street 

Philadelphia, Pennsylvania 19107 


Vice President 

Mutual Hospital Insurance, Inc. 

Blue Cross/Blue Shield 

120 West Market Street 

Indianapolis, Indiana 46204 


Senior Director 

Capital Blue Cross 

100 Pine Street 

Harnsburg, Pennsylvania 17101 


Assistant Medicare Coordinator 

Hospital Service Plan of New Jersey 

33 Washington Street 

Newark, New Jersey 07102 



Group Health, Incorporated 

326 West 42nd Street 

New York, New York 10036 


Vice President 

North Dakota Blue Cross 

4510 13th Avenue, S.W. 

Eargo, North Dakota 58121 


Assistant Vice President 

Blue Cross of Western Pennsylvania 

One Smithfield Street 

Pittsburgh, Pennsylvania 15222 



Blue Cross of Montana 

3360 10th Avenue, South 

P.O. Box 5017 

Great falls, Montana 59403 


Chief Executive Officer 

Blue Cross/Blue Shield of Alabama 

450 Riverchase Parkway, East 

Birmingham, Alabama 35298 

Second Vice President 

& Chief Medicare Administrator 
Occidental Life Insurance Co. of 

12th at Hill Street 
Los Angeles, California 90054 



Arkansas Blue Cross/Blue Shield, Inc, 

601 Gaines Street 

Little Rock, Arkansas 72203 


Second Vice President 

Professional Relations 

Pan-American Life Insurance Co. 

P.O. Box 60450 

New Orleans, Louisiana 70160 


Medicare Coordinator 

Dept . of Institutions, Social and 

Rehabilitative Services 
P.O. Box 25352 
State Capitol Station 
Oklahoma City, Oklahoma 73125 


Vice President 

Health Insurance Association of 

919 Third Avenue 
New York, New York 10022 


Vice President 

Blue Cross of Virginia 

2015 Staples Mill Road 

P.O. Box 27401 

Richmond, Virginia 23279 


Second Vice President 

Medicare Coordinator 

Pan-American Life Insurance Co. 

P.O. Box 60450 

New Orleans, Louisiana 70160 


Intermediary-Carrier Attendees 



Medicare B Operations 

Aetna Life & Casualty 

151 Farmington Avenue 

Hartford, Connecticut 



Vice President 

Director, Medicare Administration 

Mutual of Omaha Insurance Co. 

P.O. Box 456 

Downtown Station 

Omaha, Nebraska 68101 



Blue Cross/Blue Shield of Utah 

2455 Parley's Way 

P.O. Box 30270 

Salt Lake City, Utah 84125 



Blue Cross Hospital Service, Inc. 

P.O. Box 1353 

Commerce Square 

Charleston, West Virginia 25325 


Vice President 

Blue Cross/Blue Shield of Oklahoma 

1215 South Boulder 

Tulsa, Oklahoma 74119 



Blue Cross of Lehigh Valley 

1221 Hamilton Street 

Allentown, Pennsylvania 18102 


Vice President 

Blue Cross of Northeastern N.Y., Inc 

P.O. Box 8650 

Albany, New York 12208 



Government Relations 

Blue Cross/Blue Shield of 

North Carolina 
P.O. Box 2291 
Durham, North Carolina 27702 


Senior Executive Vice President 

Blue Cross/Blue Shield of Michigan 

600 Lafayette East 

Detroit, Michigan 48226 



Blue Cross/Blue Shield of Nebraska 

P.O. Box 3248 

Main Post Office Station 

Omaha, Nebraska 68180 



Louisiana Health Service & 

Indemnity Co. 
P.O. Box 15699 
Baton Rouge, Louisiana 70895 

LOUIS 3. RESCA, 3r . 

Vice President 

Blue Cross/Blue Shield of 

Massachusetts, Inc. 
100 Summer Street 
Boston, Massachusetts 02106 



Federal Programs 

Blue Cross of Central New York 

P.O. Box 271 

344 South Warren Street 

Syracuse, New York 13202 



Blue Cross/Blue Shield of Oklahoma 

1215 South Boulder 

Tulsa, Oklahoma 74119 


Vice President 

Group Hospitalization, Inc. 

550 12th Street, S.W. 

Washington, D.C. 20024 



Pennsylvania Blue Shield 

P.O. Box 6 5 

Camp Hill, Pennsylvania 17011 


Intermediary-Carrier Attendees 



Government Relations 

Blue Cross/Blue Shield Association 

840 North Lake Shore Drive 

Chicago, Illinois 60611 


Senior Vice President 

Group Hospital Service, Inc. (Part A) 

Group Medical & Surgical Service (Part B) 

P.O. Box 222146 or 222147 

Dallas, Texas 75222 


Medicare Director 

Cooperativa de Seguros de Vida 

de Puerto Rico 
GPO Box 3428 
San Juan, Puerto Rico 00936 



Blue Cross/Blue Shield of North Carolina 

P.O. Box 2291 

Durham, North Carolina 27702 


Senior Vice President 

Metropolitan Life Insurance Company 

One Madison Avenue 

New York, New York 10010 


Medicare Coordinator 

Blue Cross Hospital Service, Inc. 

P.O. Box 1353 

Commerce Square 

Charleston, West Virginia 25325 



Maine-New Hampshire-Vermont Corp. 

Two Pillsbury Street 

Concord, New Hampshire 03306 


Director, Medicare 

Nationwide Mutual Insurance Co. 

P.O. Box 1625 

Columbus, Ohio 43216 


Vice President 

Blue Cross/Blue Shield of 

Rhode Island 
444 Westminister Mall 
Providence, Rhode Island 02901 


Director, Claims 

Wisconsin Physicians' Service 

1717 West Broadway 

Monoma, Wisconsin 53713 



Blue Cross Hospital Service 

Insurance of Missouri 
4444 Forest Park 
St. Louis, Missouri 63108 


Executive Vice President - 

Arkansas Blue Cross/Blue Shield, Inc. ^ 

601 Gaines Street 

Little Rock, Arkansas 72203 


Vice President 

Blue Cross/Blue Shield 

Mutual Hospital Ins., Inc. 

120 West Market Street 

Indianapolis, Indiana 46204 



Blue Cross of Northern California 

1950 Franklin Street 

Oakland, California 94659 


Director, Medicare 

Blue Cross/Blue Shield of Delaware, Inc 

201 West 14th Street 

Wilmington, Delaware 19899 


Executive Vice President 

Blue Cross/Blue Shield of Greater 

New York 
622 Third Avenue 
New York, New York 10017 


Intermediary-Carrier Attendees 


Executive Vice President 

California Physicians' Service 

No. 2 Northpoint 

San Francisco, California 94120 


Director, Plan Operations 

Blue Cross/Blue Shield Association 

840 North Lake Shore Drive 

Chicago, Illinois 60611 


Vice President 

Medicare Coordinator 

Blue Cross of Montana 

3360 10th Avenue, South 

P.O. Box 5017 

Great Falls, Montana 59403 


Vice President 

Government Programs 

Blue Cross of Southern California 

P.O. Box 70000 

Van Nuys, California 91470 


Senior Vice President 

Blue Cross/Blue Shield of Northern 

1950 Franklin Street 
Oakland, California 94659 



Blue Cross/Blue Shield of 

Massachusetts, Inc. 
100 Summer Street 

Boston, Massachusetts 


Senior Vice President 
Associated Hospital Service, Inc. 
401 West Michigan Street 
Milwaukee, Wisconsin 53203 


Vice President 

Blue Cross of Northeastern Pennsylvania 

Blue Cross Building 

70 North Main Street 

Wilkes-Barre, Pennsylvania 18711 

Medicare Coordinator 
Capital Blue Cross 
100 Pine Street 
Harrisburg, Pennsylvania 



Senior Vice President 

Parkersburg Hospital Service, Inc. 

P.O. Box 1948 

Parkersburg, West Virginia 


Senior Vice President 

Blue Cross/Blue Shield of Michigan 

600 Lafayette East 

Detroit, Michigan 48226 

Assistant Vice President 
Hospital Plan, Inc. 
5 Hopper Street 
Utica, New York 13501 


Assistant Vice President 


Blue Cross/Blue Shield of Kansas City 

P.O. Box 169 

Kansas City, Missouri 64141 


Government Programs Coordinator 

Blue Cross/Blue Shield of Georgia/ 

Atlanta, Inc. 
3348 Peachtree Road, N.E. 
P.O. Box 4445 
Atlanta, Georgia 30302 


Vice President 

Washington Physicians' Service 

4th & Battery Building, 6th Floor 

2401 4th Avenue 

Seattle, Washington 98121 


Vice President 

Blue Cross of Washington & Alaska 

15700 Dayton Avenue, North 

P.O. Box 327 

Seattle, Washington 98111 


Intermediary-Carrier Attendees 


Director, Federal Programs 

Blue Cross/Blue Shield of Arizona, Inc. 

321 West Indian School Road 

Phoenix, Arizona 85002 



Blue Cross/Blue Shield of Greater 

New York 
622 Third Avenue 
New York, New York 10017 


Vice President 

Group Hospital Service, Inc. (Part A) 

Group Medical & Surgical Service (Part B) 

P.O. Box 222146 or 222147 

Dallas, Texas 75222 


Vice President 

The Prudential Insurance Co. of America 

Drawer 471 

Millville, New Jersey 08332 


Executive Vice President 

General American Life Insurance Co. 

13045 Tesson Ferry Road 

St. Louis County, Missouri 63128 


Vice President 

Blue Cross/Blue Shield of Tennessee 

Blue Cross Building 

Chattanooga, Tennessee 37402 


Executive Vice President 

The Prudential Insurance Co. of 

Drawer 471 
Millville, New Jersey 08332 

Senior Vice President 
Blue Cross of Oregon 
100 5.W. Market Street 
P.O. Box 1271 
Portland, Oregon 97207 


Executive Director, Medicare 

General American Life Insurance Co. 

13045 Tesson Ferry Road 

St. Louis County, Missouri 63128 


Manager, Medicare 

Wisconsin Physicians' Service 

1717 West Broadway 

Monoma, Wisconsin 53713 




National Medicare Manager 
Management Development 
Communications Corporation 
9701 West Higgins Road 
Rosemont , Illinois 60018 

Vice President 
Optimum Systems, Inc. 
2801 Northwestern Parkway 
Santa Clara, California 95051 


Government Relations 
Optimum Systems, Inc. 
Washington, D.C. 





Medical Services Administration 

Michigan Department of 

Social Services 
P.O. Box 30037 
Lansing, Michigan 48910 

Deputy Commissioner 
Medical Programs 
Texas Department of Human 

John H. Reagan Building 
Austin, Texas 78701 



Division of Medical Assistance 

and Health Services 
New Jersey Department of Human 

324 East State Street 
Trenton, New Jersey 08625 


Medical Services Assistant 

Department of Institutions, 

Social and Rehabilitative Services 
P.O. Box 53034 
Oklahoma City, Oklahoma 73105 



Vice President 
President's Management Improvement 

Price Waterhouse Corporation 
1 Memorial Drive 
St. Louis, Missouri 63102 



The Ohio State Council of 

Senior Citizens, Inc. 
3548 Cardinal Drive 
Youngstown, Ohio 44505 




March 6, 1980 



Uniform reporting requirements have been developed with the recogni- 
tion that current reporting systems have been inadequate. Traditionally, 
the Department has collected data about cost and volume of services using 
a system which gives hospitals a great deal of flexibility in how they 
report costs. That flexibility was appropriate in the early years of the 
Medicare and Medicaid programs, given the state of the art in hospital 
accounting . 

However, as the programs grew, costs increased and accounting became 
more sophisticated. Congress recognized the need for uniform reporting 
and acted in 1974 to pass the Health Planning and Resources Development 
Act (P.L. 93-641). Section 1533(d) of the Act required the development 
of uniform systems of cost accounting, reporting, classification, and rate 
setting for institutional health care providers. The Department was then 
charged with developing uniform reporting and accounting systems. Simultane- 
ously, several States passed legislation to adopt uniform reporting systems. 
In 1977, Congress mandated implementation of a uniform cost reporting system 
in the Medicare Medicaid Anti-Fraud and Abuse Amendments (P.L. 95-142). 

Why Uniform Reporting? 

Uniform reporting is necessary to improve management of our reimbursement 
programs. Current reporting lacks comparability among providers for similar 
services because of the flexibility the providers now have in reporting costs. 
This makes it difficult to judge the efficiency of hospitals and to compare 
the cost of services furnished within the hospital or among hospitals. 

Under the current reimbursement system, hospitals normally report 
their costs on the basis of their own "responsibility" accounting system. 
This means they organize their revenue and expense reports according to 
organizational units that produce the revenue and incur the expense. Each 
hospital IS organized somewhat differently, therefore, the costs are organized 
differently. Further, there are not precise or uniform definitions of what 
types of costs can be included in a particular cost center and no standard 
units of measure. Consequently, there is no adequate way to precisely de- 
termine the cost per unit of service, to compare these costs across hospitals, 
and to adequately measure productivity. Finally, current reporting permits 
hospitals the flexibility to divide or combine like Departmental costs and to 
allocate overhead costs according to the statistics recommended on the cost 
report, or other statistics, if approved by the fiscal intermediary. This 
affects HCFA's reimbursement and can result in a hospital receiving more or 
less reimbursement under the cost reimbursement system employed for the 
Medicare program. 

We need a better reporting system if we are to develop meaningful 
comparisons among hospitals and establish a better data base for reimbursement 
reforms. That system must produce data organized on the basis of "functional" 
reporting. This means that hospitals would report their revenue and expense 
according to the uniformly defined activities which generated the revenue or 
incurred the expense rather than the organizational units unique to a particu- 
lar hospital. There must also be a standard definition for the types of costs 
that can be included in a particular cost center so that costs can be reported 
and reimbursed uniformly. 


Finally, there must be a standard unit of measure for all revenue 
producing departments or cost centers. These standard units of measure 
will permit the comparison of the cost and charge per unit of service across 
hospitals. It is recognized that this cost information must be integrated 
with case mix and input price information as comparisons are made. 

A system with these features would mitigate the degree of discretion 
available to hospitals in reporting costs, to ensure that the data reported by 
hospitals IS comparable across institutions furnishing similar services. 


The Annual Hospital Report will provide data for a large number of 
users. For example, the Health Care Financing Administration (HCFA) and 
the Department will use the data to develop a more rigorous and equitable 
reimbursement system for the Medicare and Medicaid programs. Moreover, 
it will improve the capacity to detect abuse and waste, and provide for 
year to year and intennstitutional comparisons and monitoring of hospital 
expenditures, productivity and utilization of services. It also provides a 
tool in establishing more refined limits on hospital cost and reduce the need 
for many of the current hospital surveys. 

State agencies will be able to identify patterns of utilization and 
evaluate effectiveness of State and regional programs. States will be 
assisted in carrying out State program objectives including: providing 
the necessary data for policy and reimbursement decisions at the State 
level, reducing redundant data collection activities, and obviating the 
need for the development of 50 different systems across the United States. 

Hospitals will be provided with comparative information which will 
help them identify opportunities to make more productive use of their re- 
sources. They will be able to compare the performance of their own institu- 
tions against that of similar situations (improving management awareness and 
resulting in cost savings) and be better able to evaluate the competitive 
position of the institution. 

Other users, such as health planners and lending institutions, will 
benefit from this data. Health planners will be able to gather an inventory 
of health services, find cost efficiencies and evaluate financial feasibility. 
Lending institutions and investors will be able to determine the financial 
viability of projects for debt financing. 


In analyzing the effect of this proposed regulation on hospitals, we 
assessed the cost and burden of seven alternatives out of the literally 
hundreds of variations that could be devised. The alternatives range from 
total conversion of the hospital's day to day accounting system to retention 
of the current Medicare reporting system. Although the first of these al- 
ternatives (total conversion of a hospital's accounting system) cannot be 
required by HCFA and the last is contrary to the mandate of P.L. 95-142, we 
included them for costing purposes since they represent both ends of the 
spectrum and thus indicate the entire range of marginal cost/burden from $208 
to $0 million for the first year. 


Under the alternative we selected, the total start up costs for all 
hospitals would be $19 million, and the annual operating costs $37 million, 
for a total of $56 million in the first year. The total cost in the first 
year would be only 0.2 percent of the $25 billion we paid to hospitals m 
1978 and only 0.079 percent of the $70.9 billion hospitals received from all 
sources in 1978. For the average hospital which billed Medicare and Medicaid 
$3,589,000 in 1978, this proposal would add only $5,300 yearly to its operat- 
ing costs. 






March 10, 1980 

I. Introduction 

In a time when excessive inflation translates into reduced available 
resources, the challenge to all of us involved in the health care system 
IS to work together to efficiently and equitably manage the system so that it 
may continue to finance and provide quality health care services to those that 
need them. 

The health care industry as a whole must act to rationalize the existing 
system if the demands of the 1980 's are to be met. This paper discusses 
possible approaches to improving the health care information system to support 
a more efficient use of health care resources by both private and Federal 

Existing information systems need to be examined in light of antici- 
pated demands for information m this decade. The Federal government and 
private industry need to collaborate in developing and implementing a plan for 
simplifying and unifying our health data and information systems throughout 
health care industry. The result of such coordination shall be a reduction in 
the present reporting burden on all providers, better information and communi- 
cation for health care managers and planners at all levels and ultimately a 
more effective health care system. 

HCFA is committed to making a major contribution to health data manage- 
ment and the health financing systems of the 1980 's. 

HCFA's efforts will focus on participating in and supporting the develop- 
ment of more efficient approaches to the collection, dissemination and manage- 
ment of data required to support our nation's health care system. 

Our objectives include: 

o establishing common standards of communication among the users, 
and between the providers and users; 

o promoting cost effective, alternative systems for capturing and 
disseminating data to multiple users; and 

o movement towards paperless transactions. 

Initially, our targets for improvement will include: 

o incompatible communication standards within the system; 

o redundant or burdensome reporting; and 

o technically outdated or paper oriented information management 

We will be promoting regular dialogue among users and providers of 
health data to achieve these objectives. 

Through coordinated activities in these important areas, improvements 
will be realized in terms of: 


o improved accuracy of recorded and reported data 
o improved timeliness of recorded and reported information 
o reduced costs for data entry, collection and processing 
o reduced reporting burden on the provider 
o reduced processing time 
II. Background and Perspectives 

A. Industry Overview 

o Within the past 20 years, health care has grown into a major 
industry. In 1960, total spending for health in the United 
States amounted to $27 billion. By last year, it had increased 
to $182 billion -- a rise of almost 700 percent. 

o Health care now represents ten percent of the GNP. 

o Similarly, in a little more than a decade, government financing 
of health care has turned into big business. HCFA enters the 
decade of the 1980 's with an annual budget of almost $48 billion 
which finances about one quarter of the nation's total health 
care expenditures. HCFA programs have become the largest 
purchasers of health care services in the free world. 

o These figures represent a sharp contrast to the expenditures 
of the Medicare and Medicaid programs when they first began 
in the mid 1960's. For example, m FY 1966 the Medicare and 
Medicaid programs spent $3 billion m health care benefits. 

o The creation of HCFA in 1977 brought together the Medicare, 
Medicaid and related quality assurance programs into one admin- 
istration. Since then, HCFA has become the focal point for 
Federal government financing of health care. 

Today, HCFA is responsible for financing quality and timely health 
care services for its 47 million beneficiaries -- the poor, the aged, and the 

B. Growth of Health Data Information Systems 

When government financing of health care began, operations were basically 
patterned after other health care insurers of the day, adopting many of the 
existing reimbursement approaches. 

As government provision and financing of health care services evolved, 
programs were added, and requirements were changed. The health care industry 
refined its operations to meet growing government demands. The net result of 
rapid growth in the government purchase and provision of health care and 
associated information requirements has been the creation of a complex and 
relatively inefficient set of information systems. 


Initially, when a government program changed aspects of its operations, 
or a new program led to additional information requirements, the impact on the 
health care industry was relatively insignificant. But as the government 
sector expanded, so did the data and information handling needs. Likewise, 
private sector information requirements have increased. As a consequence, 
information collection and use represents a multi-billion dollar business 
which has not been systematically conceived and developed and most likely 
contributes to aggregate health care system inefficiencies. Such inefficien- 
cies absorb dollars which could be better spent on health care services or 
other social needs. 

Today, efforts by any one of us to revise some aspect of this system can 
result in major disruption throughout the health care sector and may not 
necessarily benefit the industry as a whole. 

This paper proposes a series of initiatives which will rationalize 
existing information flows and reduce the burden and costs associated with 
data acquisition as well as improve the utility of resultant data. 

C. HCFA Management Initiatives 

The creation of HCFA brought together five different programs from three 
agencies. HCFA programs include: 

o Medicare 

o Medicaid 


o Provider Certification and Standards 

o Quality Control 

To facilitate effective administration of HCFA programs, and to promote 
more cohesive decisionmaking across these programs, HCFA established an 
administrative framework which realigned its management along functional 
lines. The realignment provides a framework for promoting consistencies 
across its programs. 

In the past, as a result of differing philosophies and different histor- 
ies, HCFA's programs often operated in different ways while seeking similar 
results -- the purchase of quality services for beneficiaries. 

As a result, providers have been confronted with conflicting or duplica- 
tive paper work and other requirements. The public, beneficiaries, and 
Congress have been confused about programs and concerned about cost 

With HCFA's administrative structure now in place, we should work to 
achieve management and operating efficiencies in the way our programs operate 
and in the way data is collected. 


III. Initiatives 

A. HCFA Role 

As the nation's largest financer of health care, the activities HCFA 
undertakes and the policies which HCFA implements will significantly impact 
others in the system. HCFA must ensure that its policies and actions promote 
efficiency and quality within the total health delivery system. This requires 
a constructive relationship with providers and third parties involved in that 

Efforts to improve information systems will also encompass HCFA's re- 
sponsibility to implement uniform reporting as required by Section 19 of P.L. 
95-142. V 

B. Assumptions 

The characteristics and conditions which we assume will continue include: 

o Quality assurance and planning activities will continue to improve; 

o Reimbursement to physicians will be predominately fee for service in 
the near term, but other systems will continue to be tested; 

o Attempts to reform institutional reimbursement will continue, 
e.g., case mix, prospective rates, etc.; 

o We will continue to prepare for enactment of some form of national 
health plan. 

We also assume that the data, information, and methods of communi- 
cation which comprise the systems necessary to operate and manage HCFA pro- 
grams are now, and will continue to be, essentially similar to those of others 
in the business of financing health care. 

We further assume that by adopting common standards of communication 
the system as a whole will benefit in terms of improved timeliness, quality 
and utility of data and reduced burden on the provider. 

C. Preliminary Initiatives 

1. Common Standards of Communication 

HCFA programs will be moving toward common standards of communi- 
cation including: 

o common data sets 

o common definitions 

o common coding systems 

o common identifiers 

1/ Section 19 of P.L. 95-142 requires the Secretary to implement by regula- 
tion, uniform reporting of cost, capital assets, rates, bill and discharge for 
all classes of providers. HCFA has been delegated this authority. 


Our initial focus for implementing common standards of communication has 
been primarily directed at the institutional sector of the industry. Many 
years of effort have already been devoted to developing and testing these 
common standards in the hospital sector. Initial work progressed in this area 
because expenditures for hospital care represent a large percentage of our 
budget: $26 billion m 1980, or about 58 percent of the HCFA's budget. 

Other initiatives include common procedure labeling and uniform physician 
and supplier billing. 

2. Alternatives for Capturing and Disseminating Health Data 

We hypothesize that by employing common data elements, definitions and 
coding systems, along with improved technology, the reporting burden to the 
provider will be reduced while utility to users will increase through improved 
quality, timeliness and compatibility of reported data. 

Toward this end, we have begun assessing elements of health care infor- 
mation systems which are similar and dissimilar, including: 

o data elements, 

o data flow, and 

o information needs of users. 

For the hospital sector, it is apparent that a variety of users require 
markedly similar data within two categories of information: 

o patient information including claims data and clinical data which is 
recorded and reported on a daily basis; 

o facilities data, including cost information and utilization statis- 
tics which is recorded and reported on an annual basis. 

a. Patient Health Care Information 

We are exploring alternative approaches to capturing and disseminating 
patient information. 

One approach HCFA is currently testing is a conceptual model for linking 
hospital bill and discharge data. 

The objectives of this system include (1) reducing unecessary burden on 
the provider; (2) improving quality and timeliness of data; and (3) meeting 
the needs of multiple users. 

These systems build on standardized communication tools (codes, defini- 
tions and core data sets) being in place m hospitals throughout a State. The 
model includes the following basic functions: 

o integration of bill and discharge data in the hospital through 
uniform input; 

o transmission (preferably electronically) of the integrated data to a 
central clearinghouse or directly to users; 


dissemination of appropriate data to authorized users including thir 
party payors, PSROs, HSAs, State statistical agencies, and HCFA; an 

compilation of State and local comparisons 
information for hospitals. 

and other managemen 

This concept of integrating discharge and bill data suggests a substan 
tial but mutually beneficial departure from the existing collection an 
processing systems in existence today. But in spite of the benefits, it i 
already clear that changing the traditional approach to the recording 
handling, and flow of data will not be easy. In addition to encountering thi 
inevitable issues attendant to change, the data systems must grapple with somi 
of the key issues in health care today, including personal privacy and confi- 
dentiality; access and ownership of data; and political and jurisdictional 

HCFA has recently awarded demonstration grants to organizations to test 
the integration of health information in New York, Maine, Vermont, Minnesota, 
South Carolina and Missouri. 

We believe there are a variety of approaches which will improve anc 
facilitate data integration and automated transmission. HCFA is encouraginc 
organizations which are interested in testing alternatives to contact us. 

b. Cost and Facilities Information 

o HCFA will be publishing a Notice of Proposed Rulemaking announc- 
ing the Annual Hospital Report (AHR). The AHR will include 
requirements for reporting cost and facilities information for 

o Basic features of the Annual Hospital Report are described 

meets uniform reporting requirements of Section 19 of P.L. 

consolidates existing/overlapping reporting 

incorporates unmet needs of health planners, others 

developed through intensive consultation with industry, 
Congress, and other agencies within HEW 

based on standard definitions 

will provide accurate comparisons across hospitals 

will be automated to the maximum extent feasible, to provide 
rapid feedback 

will serve as a basis for reporting to multiple users 


Medicaid State agency 


state and local health planners 
State Centers for Health Statistics 
State rate setting agencies 

c. Linking Data Bases 

o As a long range objective, HCFA would like to explore approaches 
to linking and concentrating AHR information with case mix 

o Ultimately we would like to see comparable and compatible infor- 
mation generated from providers at all levels of care ranging 
from acute, to long term care, to ambulatory. 

o We would like to work closely with industry to develop these 

d. Quality of Information 

Through all phases of development of these systems, maintaining and 
improving quality assurance of data input and handling will be a critical 

e. Other Directions/Initiatives 

HCFA intends to develop similar standardized systems for all providers, 

o long term care facilities 

o ■ home health agencies 

o health maintenance organizations 

o physicians 

3. Collaboration with the Industry 

HCFA is committed to involving the industry as we develop this new 

This IS one of a series of discussion papers we will be sharing with the 
industry to specifically solicit the industry's comments and recommendations 
on our directions and initiatives. We encourage you to comment on the issues 
presented m this paper. 


Please forward any comments or recommendations 
on this discussion paper to: 

James M. Kaple 

Acting Director, Office of Research, 

Demonstrations and Statistics 

Room 5054 

Mary E. Switzer Building 

330 C Street, S.W. 

Washington, D.C. 20201 

Please reference the title and date of discussion 
paper in your comments. 





March 10, 1980 


This discussion paper is to set forth major HCFA program administrative 
objectives for improving the operating framework of the Medicare and Medicaid 
programs. The Health Care Financing Administration intends to strengthen the 
operating framework for these two programs to achieve improved services to 
beneficiaries and providers, more accurate and timely program payments, and 
reduced costs. These efforts must evolve towards increasing the compatibility 
and improving the interface of these two programs with the health delivery 
system and private health insurers. 

Major reliance has been placed on the States in Medicaid and private 
contractors in Medicare to carry out the day to day operational administration 
of the programs. HCFA views these relationships and responsibilities to be 
appropriate and they will be continued. HCFA has no plans for assuming direct 
responsibility for operations. It does plan to take positive steps with the 
States and contractors to modify and improve the operational framework. 

It is important in this context to emphasize that HCFA recognizes basic 
and fundamental differences between Medicare and Medicaid which will continue 
to affect the operational framework. Medicaid is a State administered program 
funded with both State and Federal funds, whereas. Medicare is Federally 
administered and Federally funded. The Medicaid program and its coverage 
vanes according to the options exercised by the several States, and includes 
benefits, such as prescription drugs and ICF care, which are not available 
under Medicare. On the other hand, the Medicare program and its coverage is 
national in scope and is uniform. The two programs differ also m the bene- 
ficiary/eligible population addressed and in the basis for qualifying or 
establishing entitlement. 

Although programmatically there are major differences, there are also 
significant areas of functional similarity and need for compatibility of 
information. Both deal essentially with the same community of hospitals, 
physicians, and other providers. They are both high workload, ADP oriented 
programs which rely extensively on contractors, fiscal agents and other 
support services. There is a great commonality of need with respect to 
procedure codes, uniform bills, uniform cost reports, common audit, payment 
screens, utilization, medical necessity, fraud and abuse. Both programs are 
heavily involved with the health delivery system as they address the same 
basic issue of financing the health care needs of their client population. 

In addressing the operational framework of the two programs, the differ- 
ences and similarities must be taken into account and, as well, the relation- 
ship of the two programs to private insurers. Our objectives will be to 
maximize common processes, policies, procedures, and information requirements. 
Major initiatives will be undertaken with respect to performance standards, 
competitive procurement requirements, implementation of MMIS, financial 
management, budget estimates, contractor configuration, selection of contrac- 
tors and fiscal agents. Improved standards of performance will be developed 
and issued for Medicare Part A and Part B and for Medicaid. 

The scope of the activities and objectives for addressing the operational 
framework are set forth m greater detail in the following section of this 
discussion paper, which addresses Medicare objectives. A discussion paper on 
Medicaid will be forthcoming shortly and will be available for distribution to 
all parties in May at the time of our annual Medicaid directors' conference. 


Comments and recommendations from interested parties will be appreciated. 
Comments should be submitted to Mildred L. Tyssowski, Director, Bureau of 
Program Operations, Room 300 East High Rise, 6401 Security Boulevard, 
Baltimore, Maryland 21235. 

Medicare Objectives - General Background 

There have been significant changes in Medicare program administration 
over the years with respect to technology, organization and program accep- 
tance. The initial administrative structure has served well m meeting the 
original needs of the program. Reliance on the private sector contractors has 
been quite successful in the administration of the program and there is no 
demonstrated need for changing this partnership. 

However, the intense pressure of the evergrowing workloads experienced, 
the increasing complexities in policy and procedures, the new initiatives 
to contain health care costs, all have created a current environment that 
demands a new look at the administrative structure in Medicare. There is 
a real need to establish now a framework of operations that will go directly 
to simplification of process and procedure, to improvement in the timeliness 
and the accuracy of program payments, to improvement in the quality of service 
to providers and beneficiaries and to better understanding and more uniform 
application of program policy. To address these needs and work towards the 
establishment of an operational framework which will more effectively serve 
program needs in the 1980 's and future years, the present configuration of 
Medicare contractors must be reassessed. 

A major consideration in these deliberations is the desirability of 
combining the administration of Medicare Part A and Medicare Part B in a 
single contractor structure. The initial separation of Part A and B was 
an accident of the legislative development of the Medicare program. It is 
unlikely such a split would occur if the law were written today. The consoli- 
dation of Part A and Part B would provide for greater effectiveness and 
consistency in program administration and considerably enhance the program's 
capability to accommodate and implement legislative changes in the future. 

There are many crossovers between the two parts of the program and 
combining them under a single contractor for a defined geographic area 
would decrease the number of Medicare contractors and should reduce admin- 
istrative costs, provide for better utilization review and control of program 
payments, provide for better coordination and flow of information on program 
activity and improve the exchange of data with Professional Standards Review 
Organizations (PSROs), Medicaid and other agencies, public and private. 
Combining A and B would also simplify beneficiary access to and understanding 
of the Medicare program. There is also a need for concerted efforts to assure 
an effective interface and operating relationship with PSROs in light of their 
lead responsibilities for addressing medical necessity and utilization. 

In the President's fiscal year 1981 budget, a total of $719.6 million is 
estimated to be spent on Medicare contracts. Except for funding a few 
experimental contracts which were awarded competitively, this money will 
be spent on negotiated contracts, with the contractors being reimbursed 
on a cost basis. For no other program in the Federal government is such 


a high dollar volume of contracts awarded on a noncompetitive basis. Further- 
more, in the Part A program the contractor is selected by the providers that 
it services for Medicare payment. Competing Medicare contracts should bring 
innovations to claims processing systems, and facilitate the selection of new 
contractors when turnover occurs, and result in improved service at less 

This discussion paper outlines a strategy and approach for addressing the 
needs for change in the operational framework for administering the Medicare 
program. The goal of the Health Care Financing Administration is to establish 
an improved Medicare contracting structure which will best serve long range 
program objectives. 

Recent Reviews of the Medicare Operating Framework 

In 1978, an internal HEW study was carried out which concluded basically 
that administration of Parts A and B of Medicare should be combined, contracts 
should be let competitively, and contractors should be reimbursed on other 
than a cost basis. An independent study conducted by the General Accounting 
Office (GAO) for Congress in 1979 supported some of the same conclusions, and 
encouraged HEW to proceed with competitive contractor experiments. The 
President established, in September 1979, a Management Improvement Council 
(PMIC) made up of leaders in private industry to advise him on ways to improve 
management of the Federal government. A subcommittee was established on 
Health Care Costs which took as one of its first assignments a review of our 
Medicare contracting strategy. Some of the major conclusions as reflected in 
their draft report supported competition in the selection of contractors; the 
reduction in the number of Medicare contractors; the combination of the 
administration of Parts A and B of the program under one contractor; and 
the development of contractor geographic areas based on optimum workloads. 

Contracting Strategy 

Based on these assessments and our experience to date with the existing 
structure, we have formulated a contracting strategy for Medicare which 
over the next five to ten years will gradually reduce the number of contrac- 
tors. Our strategy is designed to achieve more accurate and timely program 
payments and improved services to providers and beneficiaries at reduced costs 
to the government. It also addresses the need for a simplified framework for 
program administration so that beneficiaries and providers of services will 
better understand the operation of the program and so that efficiencies can be 
introduced more easily, e.g., common claims forms, more uniform cost reports, 
common diagnostic codes, common procedure codes, more effective prepayment and 
postpayment screens, automated billing and data reporting techniques. 

The four basic elements in our Medicare contractng strategy are: 

1. Establishing standards of performance incorporated in the contracts . 
These standards could then be used for assessing monetary damages or 
taking contract action for poor performance or making incentive 
payments as a bonus for superior performance. It is not now possi- 
ble to assess liquidated damages or make incentive payments in the 
cost contracts. 


2. Selecting and awarding contracts through competition and on other 
than a cost basis . 

3. Combining in a single contractor for the territory administra- 
tion of both Medicare Part A and Medicare Part B . 

4. Reduction m the number of contractors by establishing contrac - 
tor territory on the basis of geography, workload , and potential for 
administering new health insurance legislation. 

In pursuing this strategy we will be employing a multi-faceted approach. 
We will continue our experimental initiatives to gain additional experience 
with other contracting modes, functional arrangements, and methods of reim- 
bursement for administrative costs. This will assist us in further refining 
our contracting strategy. Administrative actions, in the framework of present 
law, will be taken in pursuit of these objectives. Contractor performance 
will be monitered closely against published standards and contract action will 
be taken, as appropriate, where performance does not meet the standards 
established. We will also continue our efforts to seek legislative changes to 
provide the Secretary with greater flexibility in the selection and reimburse- 
ment of contractors. 

Administrative Initiatives 

Our administrative actions under current authority will be directed 
primarily toward contractors whose performance is unsatisfactory. Performance 
standards have been published for Part A contractors and will be published 
soon for Part B contractors. Contractors who fail to meet the standards 
published will risk termination of their contract or modification in the scope 
of their service. This activity will be ongoing in nature and will have the 
result of eliminating poor performers. Under our existing performance 
measurement system, we have identified and put on notice a number of contrac- 
tors whose performance is not satisfactory. These contractors are now working 
to meet specified performance objectives established by our regional offices. 
Failure to meet these objectives may result m adverse contract action being 

Additional administrative actions planned involve the announcement and 
designation of a single intermediary to serve all home health agencies (HHAs) 
m a given State. This action is consistent with congressional concern for 
improving HHA program administration and the presumption that by having fewer 
contractors involved in the administration of the program, greater expertise 
in handling home health reimbursement and utilization issues can be achieved. 
The present authority of providers to select their contractor in the Part A 
program has resulted in a widespread dispersion of providers serviced by the 
large Part A commercial insurers. Health Care Financing Administration plans 
to work with these organizations to reduce the wide geographic dispersion of 
the providers they serve through some consolidation of their activity. We 
will also be working with the Blue Cross Association which subcontracts basic 
intermediary functions to the local Blue Cross Plans to reduce the number of 
subcontracting Plans in a single State where it is in the program's interest 
to do so . 


Experimental Initiatives 

Under the experimental authority contained in section 222 of the 1972 
amendments, we have implemented three competitively let fixed price contracts 
in Medicare Part B in Maine, Illinois and upstate New York. We also initiated 
a Part A experiment in Missouri and a combined Part A and Part B experiment in 
the three State area of Colorado, Utah and Wyoming. In the last two in- 
stances, litigation is in process and future action is pending appellate court 
decisions. In the Illinois experiment, litigation was also involved and the 
Secretary's position prevailed. We anticipate a ruling by the circuit court 
of appeals in the Missouri experiment in March or April. In the Colorado, 
Utah, Wyoming experiment, briefs are to be filed with the circuit court of 
appeals in mid-March. (Details with respect to these experiments will be 
found in Tab B.) 

These experiments have demonstrated that competition does result in 
administrative savings (net projected at $34.8 million in Illinois and $15.6 
million in upstate New York). They have also identified for us specific 
transition problems which will have to be overcome in future procurements 
through revision in the procurement process by strengthening implementation 
performance requirements, closer monitoring of performance, and better testing 
of operational capability to assure the least disruption in program services 
to beneficiaries and providers. To facilitate future transitions, our experi- 
ments have also demonstrated the need for uniform national procedure codes, 
uniform bills/claims, and a consistent approach to locality structures and to 
specialty recognition for establishing profiles and screens. We are hopeful 
of favorable decisions in the pending appeals as we are most anxious to 
experiment in Part A and also m a combined Part A and Part B operation. We 
will have to reassess the current situation when the decisions are rendered. 

We are giving consideration to a possible additional experiment in Part A 
that would separate out the audit and reimbursement functions; we will 
propose a contract for audit and reimbursement on a cost basis, with the 
claims processing function conducted on a fixed price basis. 

A combined Part A and Part B experiment is required to determine the 
degree we can achieve integration of common data files and crossover informa- 
tion, and to learn how a combined operation should be best run. To the extent 
that good software systems can be developed to combine Parts A and B, there is 
a good potential for improving the accuracy of program payments. Finally, we 
will work toward a contract to combine the administration of Medicare A and B 
and Medicaid in a State. This project will be of importance in planning and 
preparing for national health insurance legislation. 

Model Configuration 

Currently, there are 119 Medicare contractors with 76 in Part A and 43 in 
Part B. Administrative costs in FY 1981 will run about $719 million including 
a contingency fund. The operating estimates for Part A are $243 million and 
for Part B are $456 million, and a contingency fund of $20 million. The total 
claims workload to be processed is at 208 million claims (Part A, 42 million 
and Part B, 166 million). In addressing the current configuration to deter- 
mine what our optimum objective should be, we have taken into account a number 
of factors including the following: (1) maintain consistency with HEW region- 
al boundaries; (2) use of States as basic building blocks; (3) achieve, where 


possible, for each contractor territory a workload of four to ten million 
claims; (4) maintain enough small contractors to assure entry level for new 
contractors; (5) combine Medicare A and B; (6) assure administrative cost 
savings; and (7) improve management of program payments and improve service to 
beneficiaries and providers. 

With these critical elements in mind, we have developed a "model" config- 
uration of Medicare contractors which would number from 50 to 60 with each 
contractor administering both Parts A and B in the defined territory. An 
underlying principle in this configuration structure is that of geographical 
integrity, meaning that all providers and beneficiaries in the defined geo- 
graphical area will be served by the single contractor for that area. In the 
more populous States, there may be a need for two contractors. In less 
populous areas, multi-State contractors would be considered. A model of 52 
contractors is attached for illustration and discussion purposes (Tab A). 

Reduction in the number of contractors and consolidation of service areas 
on a geographic basis promises significant cost savings through economies 
of scale and reduced overhead costs, and the opportunity for improvement 
in the quality of services and in beneficiary and provider understanding. We 
estimate that such a configuration, when fully implemented, would result in 
administrative cost savings of $124 million annually on an ongoing basis, 
measured against current costs. 

Implementation Considerations 

Implementation of a new configuration of contractors must be carefully 
planned and be carried out m a manner consistent with our administrative 
and operational capabilities and least disruptive to beneficiaries and 
providers of service. We believe implementation would have to be phased 
in on an incremental basis over a period of five to ten years. 

Upon enactment of the necessary legislation, hopefully in 1980 or 1981, 
we would announce the specific incremental schedule of implementation. It 
will be a major procurement undertaking and it will be critical that we 
proceed consistent with our administrative capabilities and to assure the 
least program disruption. In this regard, it is important to note here 
that we do not propose frequent turnover m contractors. Rather, with some 
possible exceptions in the smaller jurisdictions, we contemplate contract 
terms m the range of five years with built in options for extension and 
renegotiation of price at the end of the first three years. We plan for the 
competitive selection of all contractors and believe reimbursement must 
be on other than a cost basis, e.g., overall fixed price with adjustment 
for workload volume changes, fixed rate, and that the contracts spe- 
cifically include performance standards which address quality, accuracy 
and timeliness of payments. 

Legislative Needs 

Legislation was introduced last year which sought to (1) remove the 
existing requirement for the Secretary to reimburse on a cost basis; (2) 
permit organizations other than health insurers to serve as Medicare contrac- 
tors if they can demonstrate their experience and capability to handle 
Medicare contracts; and (3) eliminate the nomination process and permit the 
Secretary to select contractors without regard for provider preference. We 
cannot, except on a limited experimental basis, pursue competitive selection 
and reimbursement on other than a cost basis until the statute is amended. 



1. 52 Contractor Configuration Map — Model for Discussion 

2. Combined A/B Workloads for 52 Contractor Configuration 

3. Part A Intermediary Workload Distribution 

4. Medicare Part B Carriers 
























































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Model for Discussion 


n 1985 Proj«ct« d Workload (Ip thou»«ndi) 






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Upttatt Naw York 




Katro Naw tork 




New Jaraay 




Puerto Kieo/Virtlo Iilanda 





Eaatcm Pannaylvania 




Wtftera Pcnnaylvanla 








Ha ry land 




Dlatrlct of Coluabla 








Ucat Virginia 













North Carolina 




South Carolina 
















North Florida 




South Florida 










































New Mexico 










































North Dakota 




South Dakota 





Northern California 




Southern California 












Bawaii/Cuaa/A>erlcan Samoa 




















1. Current Experiments 


Current Experiments 

1. Maine (Part B) 

This fixed price procurement was awarded for a total contract price 
of $5,285,000 which represents a net savings of $772,556 when 
compared with the projected expenditure under a cost reimbursement 
contract. The contractor's general performance has been satisfac- 
tory. The experimental contract initially covered the July 1, 1977, 
through September 30, 1980, period, but negotiation with the con- 
tractor has been completed for the extension of the contract an 
additional year per the optional provision available to the govern- 
ment in the original procurement. 

2. Illinois (Part B) 

This fixed price procurement was awarded for a total contract price 
of $41,800,000 which represents a net savings of $34,790,232 when 
compared with the projected expenditure under a cost reimbursement 
contract. The winning contractor assumed responsibility for an 
entire State which was previously serviced by two different contrac- 
tors. This contract became fully operational July 1, 1979, and 
extends through September 30, 1983. The contractor has encountered 
operational problems which are now being addressed and the contrac- 
tor will be subject to assessment of liquidated damages for poor 
performance in the October-December 1979 quarter. 

3. New York (Part B) 

This fixed price procurement was awarded for a total price of 
$20,296,150 which represents a net savings of $15,593,270 when 
compared with the projected expenditure under a cost reimbursement 
contract. The winning contractor assumed responsibility for geo- 
graphical area previously divided among three different contractors. 
This procurement became fully operational on October 1, 1979, and 
extends through September 30, 1982. 

4. Missouri (Part A) 

The first fixed price competitive bid contract under Part A was to 
be awarded July 2, 1979. The term of the contract was to be January 
1, 1980, through December 31, 1982. The projected savings in 
Missouri are $1.5 million. On June 29, 1979, the U.S. District 
Court of Western District of Missouri rendered a decision which 
enjoined HEW from making an award in the procurement. The suit was 
initiated by the Blue Cross Association, et. al . Among other 
things, the parties initiating the suit contend that the planned 
experiment violated existing Medicare legislation, which permits 
participating providers of health care services to nominate their 
Part A fiscal intermediary. On August 27, 1979, HEW filed an 
appeal with the U.S. Court of Appeals for the Eighth Circuit re- 
questing a reversal of the lower court's decision. Oral arguments 
were completed two weeks ago and a decision is expected m March or 



5. Colorado, Utah, and Wyoming (Consolidated Parts A/B) 

The RFP for this procurement was released on August 2, 1979. This 
experiment is designed to test the potential efficiencies of merging 
several contractor operations m a multi-State environment and the 
feasibility of a common claims process for the Medicare Parts A and 
B programs. The projected savings in this experiment are 
$7,000,000. The preproposal conference on the RFP was held on 
September 12 and responses to the questions raised at the conference 
were mailed to the attendees recently. On September 14, 1979, the 
Blue Cross Association filed a suit with the U.S. District Court for 
District of Wyoming, and HEW has been enjoined from conducting this 
experiment. HEW has appealed to the Circuit Court of Appeals and 
briefs are to be filed in March. 
















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February 28, 1980 

Diagnosis labeling systems for classifying diseases, conditions and 
illness, and codes to identify each diagnosis are vital in describing why 
medical services were sought or provided. Procedure labeling systems describe 
in scientifically accurate terms the specific medical services provided, and 
attach unique codes to each unique procedure. 

The Health Care Financing Administration wishes to inform all parties 
concerned or affected by our policies related to obtaining and using diagnosis 
and procedure information, of our goals for improving consistency, accuracy 
and comparability in the labeling of these important data elements. 

Diagnosis Coding (1CD-9-CM) 

Substantial progress has been made since the September 14, 1978 announce- 
ment that use of 1CD-9-CM was to become the required diagnosis labeling system 
for HEW financed programs. Efforts by a number of organizations have resulted 
in the establishment of ICD-9-CM as an almost universally accepted and used 
disease classification system in U.S. hospitals, health care financing pro- 
grams and data systems. 

HCFA IS especially thankful for the efforts of the U.S. Public Health 
Service and its National Center for Health Statistics for convening the 
Steering Committee which provided advice and guidance to the Commission on 
Professional and Hospital Activities in the development of this system, and to 
the organizations represented on this steering committee — 

American Association of Health Data Systems 

American Hospital Association 

American Medical Association 

American Medical Record Association 

Association for Health Records ^^~~- 

Council on Clinical Classifications 

WHO Center for Classification of Diseases 

in North America 

In March 1978, The American Hospital Association began encouraging 
members to introduce ICD-9-CM in hospitals by January 1979. The American 
Medical Records Association and the American Hospital Association under- 
took an active effective effort to train constituents in use of this new 
system. HCFA undertook a series of annoucements to State Medicaid agencies to 
encourage their adoption of ICD-9-CM for diagnosis labeling, issed require- 
ments to PSROs that ICD-9-CM be used for the PSRO Management Information 
System and the PSRO Hospital Discharge Data Set, and instructed Medicare 
intermediaries to accommodate hospital conversion to ' ICD-9-CM and to use 
ICD-9-CM in any tape billing or other diagnosis labeling activity performed in 
their Medicare intermediary role. Since 1979, ICD-9-CM has been used in the 
HCFA centralized coding of sampled Medicare Part A claims. In May 1979, the 


Blue Cross Association and Blue Shield Association announced that ICD-9-CM 
used by their members would be required for the Federal Employee Program, 
National Account Paid Claims and Inter-Plan Bank records. 

In June, 1979, the Health Care Financing Administration and the U.S.- 
Public Health Service National Center for Health Statistics convened the 
first of a series of meetings of representatives of non-Federal health 
industry interests to discuss the prospects for a universal procedure labeling 
system. The goal was to coordinate, simplify and improve the quality and 
utility of procedure information as was being accomplished with diagnosis 
labeling. At that meeting, there was a strong concensus that Volumes 1 and 2 
of ICD-9-CM are suitable for universal use in diagnosis labeling. Participat- 
ing organizations included: 

- American Association of Health Data Systems 

- American Association of PSROs 

- American Hospital Association 

- American Medical Association 

- American Medical Record Association 

- Blue Cross Association 

- Blue Shield Association 

- Commission on Professional and Hospital Activities 

- Federation of American Hospitals 

- Health Insurance Association of America 

- Maryland Health Services Cost Review Commission 

- Michigan Medical Services Administration 

- National PSRO Council 

- New Jersey State Department of Health 

- New York State Department of Health 

- Texas Department of Human Resources 

- Public Health Service 

- Health Care Financing Administration 


Procedure Labeling (Modified CPT-4) 

This group expressed a consensus that a universal procedure labeling 
system would be desirable if feasible. A series of followup meetings 
were held through November 1979 to further consider the feasibility of 
universal procedure labeling. There was general agreement that uniform 
procedure labeling was feasible for all settings, but concern was expressed 
that ample time should be provided to develop and evaluate such a system prior 
to its introduction. 

In HCFA programs there are two major uses of procedure information. 
The major use of procedure information is for Medicare and Medicaid programs 
in the determination of reimbursement for professional fees. The second 
important use of procedure information is the conduct of professional stand- 
ards review. 

Through continued industry liaison it has been concluded that a uniform 
procedure labeling system could and should be developed based upon Physicians 
Current Procedural Terminology - 4th edition (CPT-4). 

CPT-4 was chosen because: 

CPT-4 IS already familiar to and used by many physicians. 

CPT-4 contains the most comprehensive listing of terminology describ- 
ing medical procedures and practices. 

CPT-4's coding structure (five core digits plus two-digit modifier 
codes) IS adaptable for procedure coding for nonphysician services. 

There are numerous third party payment programs including several 
State Medicaid agencies which have effectively employed CPT-4 or 
closely akin systems for their reimbursement needs. 

The American Medical Association has developed and implemented 
mechanisms for keeping the contents of CPT-4 updated to reflect 
changes in medical technology, and in this process, AMA considers 
recommendations for changes arising from various sources throughout 
the health sector. 

The costs of implementing a CPT-4 based system appear to be lower 
than the costs of adapting some other widely used system or develop a 
brand new system. 

The American Medical Association has indicated its willingness 
to come to agreement with HCFA concerning copyright and other 
issues associated with use of CPT-4. 

This year we intend to review CPT-4 to determine what kinds of modifica- 
tions are needed to make CPT-4 suitable for use in all settings. These 
would include labeling procedures for the preparation of medical record 
abstracts needed by the Professional Standards Review Organizations, as 
well as for use m Medicare and Medicaid reimbursement operations. Results of 
this effort and plans for testing and evaluating the resulting prototype will 
be shared with all interested parties. 


HCFA intended to pursue the goal of ultimately having a common approach 
to procedure labeling that can effectively meet all Medicare, Medicaid 
and PSRO program needs for procedure information. We plan to continue to 
work with the Public Health Service National Center for Health Statistics, the 
AMA, AHA and other representatives of the health industry, in the development 
of a procedure labeling system which can meet all HCFA program needs for 
procedure information, and the common needs of other sectors of the health 

During the course of these developments, HCFA intends to pursue a policy 
which would support the preparation of Medicare, Medicaid and PSRO data 
systems for the eventual implementation of a procedure labeling system 
based upon CPT-4. In preparation for effective reimbursement applications 
of a CPT-4 based system, HCFA has established a technical advisory group of 
Medicare carrier. State Medicaid agency and Regional and Central Office staff 
experts. They will develop recommendations concerning appropriate terminology 
and coding for nonphysician services fee reimbursement, and for controls to 
assure that claims processing and outlays would not be disrupted or escalated 
after implementation. Also, arrangements have been made with the South 
Carolina State Medicaid agency, and South Carolina Blue Shield, the Medicare 
carrier, to collectively serve as a test site for application of processing 
and reimbursement controls with CPT-4. Once we are confident that a CPT-4 
based system can be used for reimbursement purposes without adding to infla- 
tionary pressures, we intend to establish its use throughout Medicare, 
Medicaid, and the PSRO program. 


The Health Care Financing Administration is committed to the development 
of improved systems for labeling procedure information. We expect that 
uniform procedure labeling will improve the consistency, accuracy and compara- 
bility of procedure data. We believe that such improvements will result in 
much more effective management of HCFA's programs, and in substantial long run 
reduction in the costs of information needed to operate the Medicare, Medicaid 
and PSRO programs. We invite the spectrum of affected sectors in the health 
industry to support and participate in the attainment of these goals. We hope 
that the developing modification of CPT-4 will become as broadly acceptable 
for procedure labeling, as ICD-9-CM Volumes 1 and 2 have become for diagnosis 
labeling. Regulatory proposals and administrative procedures to complement 
the attainment of these goals will be forthcoming. 


Please forward any comments or recommendations 
on this discussion paper to: 

James M. Kaple 

Acting Director, Office of Research. 

Demonstrations and Statistics 

Room 5054 

Mary E. Switzer Building 

330 C Street, S.W. 

Washington, D.C. 20201 

Please reference the title and date of discussion 
paper in your comments. 


U.S. GOVERMENT PRINTING OFFICE 1980 -0- 311-168/430 


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